July 9, 2020

Don’t ignore gold as an investment option

These are heady days for the stock markets. The Sensex and Nifty have been closing at new peaks over the last few days. As of November 1, 2017, the BSE had crossed the 33,600 levels while the Nifty was at 10,440, both at record highs. In the US too, the stock market indices are trading near their historic highs with the Dow Jones having gained 18 percent this year. Other European and Asian stock markets are also doing well. In India, the inflows into the equity markets have increased after the demonetisation exercise and the crackdown on black money impacted the usual flow of money into real estate and gold. Consequently, people have been pouring money into India’s mutual funds which have been seeing record inflows so much so that large scale withdrawal of funds by foreign portfolio investors (FPIs) in recent months have failed to dampen the markets. Indeed, in the past, FPI money flowing out was invariably followed by a correction in the markets but this time around, domestic funds more than made up for the shortfall and the markets continued to rise.


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With investment in the equity markets being the flavour of the month, perhaps this is the right time for a gentle reminder why gold continues to be a relevant investment option and not be relegated to an afterthought. After all, many experts are now worried about valuations in the stock market and inclined to believe that a correction is on the cards.  Should this scenario play out, gold will certainly regain the spotlight. Now, what makes me think that gold is worthy of consideration at this juncture when equity markets are the talk of the town? An answer to this question will necessarily begin with the background and context in which gold continues to hold its own in the Indian and international financial markets.

Gold in India

India is the largest consumer of gold in the world. Our love affair with the metal is age old.  Roughly 800 to 900 tonnes, about a third of the total gold mined in the world, is consumed in India. Domestic production being negligible, we are the largest importers of gold.  The Indian attachment to gold is a product of our history. Gold is rare, beautiful and stable. It does not depreciate in value nor deteriorate in quality with time. It is compact and can be carried around with ease. It can be buried underground without loss of quality or quantity. Gold is therefore permanent, portable and easily-hidden wealth. In the olden days, when property rights were not secure — being subject to arbitrary seizures by kings, courtiers and warlords, or prone to destruction during wars etc.— gold was the most sensible way to accumulate wealth. Along the way, it became part of our culture and tradition. It acquired a social, emotional and economic significance beyond logical comprehension. Many of our traditions have changed over the years, but large scale purchases of gold during weddings and festivals continue.

While people have been investing in gold for ages, in the last few decades we have seen new avenues for investment emerge that give present day investors a range of options not available in earlier days. No doubt, each of these options has its own advantages, disadvantages and risks, which have to be kept in mind along with the investor’s own circumstances while making a choice. According to a recent nationwide debt and investment survey, an average Indian household holds 84 percent of its wealth in real estate, 11 percent in gold and the remaining 5 percent in financial assets (such as deposits and savings accounts, equity shares, mutual funds, life insurance and retirement accounts).

Investing in gold

Given the importance of gold in India, it is not surprising that it enjoys pride of place in the common man’s investment portfolio. After all, it is one of the safest avenues for investment, equivalent to bank deposits that, additionally, has offered better protection against the ravages of inflation. Over the last decade and a half, gold has delivered fairly high returns when compared to other risk free investments. Throughout history, gold has been regarded as a store of value, known to provide risk free real returns especially when inflation is up. For example, the average consumer price inflation during the three high inflation years from FY2011-12 to FY 2013-14 was nearly 10 percent. Fixed deposits with banks during this period gave negative inflation adjusted returns whereas the price of gold in India went up by 38 percent to deliver positive real returns.

Internationally, the yellow metal has outperformed the S&P 500 since the beginning of the century, returning 86 percent more than the market according to the World Gold Council. In India, the recent boom in the stock market has delivered handsome returns to seasoned traders and it has now lured less experienced retail investors to jump onto the bandwagon. While the returns have been high, it also comes with a fair amount of risk. And so, to protect one’s hard-earned savings, professional investment advisors often recommend investment through mutual funds which diversify risk on behalf of individual investor. But then, the common investor is confused by the array of mutual funds offering diverse categories and literally hundreds of schemes to choose from. Homing in on the right stock or mutual fund to buy into is not easy, and keeping track of its price movements is another hassle. Interestingly, when stock markets are trading at historical highs (both in India and abroad), and when the fears of an impending correction appear plausible, gold makes an excellent case for stepped up investment. After all, it is a general observation that when stock markets collapse during periods of economic woes, gold price often heads up in keeping with its status as a safe haven investment. The below table indicates how the international price of gold moved during eight periods of the biggest decline in US stock market over the last four decades.


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Gold price movement during a stock market crash (US)

S&P 500 –Periods of biggest Declines S&P 500 Gold
Sep 1976 – Mar 1978 (-) 19.40% 53.80%
Nov 1980 – Aug 1982 (-) 27.10% (-) 46.00%
Aug 1987 – Dec 1987 (-) 33.50% 6.20%
Jul 1990 – Oct 1990 (-) 19.90% 6.80%
Jul 1998 – Aug 1998 (-) 19.30% (-) 5.00%
Mar 2000 – Oct 2002 (-) 49.00% 12.40%
Oct 2007 – Mar 2009 (-) 56.80% 25.50%
May 2011 – Oct 2011 (-) 19.00% 9.40%



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To conclude

The verdict is clear. Gold is reliably known to hold its value during troubled times. With frothy stock markets all around, maybe now is the time to increase the allocations for gold in one’s portfolio. Of course, it is true that in recent years there was a substantial correction in international gold price from the peak levels of 2011 and 2012. However, beginning from January 2016, gold prices have regained ground and have generally held steady in the range of US$ 1,200 to US$ 1,300.

Finally, all said and done, a prudent investor will be wise to invest her savings in a diversified basket of investment options such as bank deposits, mutual funds, real estate, equity shares, gold and gold jewellery, etc. It helps to spread the risk as against having all your eggs in one basket. Investment in gold and jewellery for the long term is a safe option because the supply of physical gold continues to be meagre in relation to the demand. Therefore, while the price may fluctuate, there is protection on the downside. Recently, Gold bonds have emerged as a useful alternative to those who buy gold purely for investment purpose who now get to earn some interest on their investments though it may not interest those who buy gold jewelery for consumption.

Photo Courtesy : Google/ images are subject to copyright        



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