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Monday, April 9, 2012

Gold vs Equities

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Gold fares poorly than equities historically

IF YOU are under the impression that gold is the best asset class and has always given high returns, think again. A study done by apnapaisa.com on the stability and trend in returns of gold and Sensex over the past 30 years has revealed some startling facts. In order to smoothen out sudden spikes, the 10-year moving average of both these asset classes for the same period was calculated.

The analysis revealed that gold gave lower returns than equities. While the maximum returns provided by equity during the 10-year time band (1982­ - 1992) were 34.69 per cent, the maximum returns provided by gold was during the 10-year period of 2001-2011 at 17.36 per cent. Thus, till date, equity has given double the returns compared with gold.

However, the minimum returns given by equities were in negative of ­2.09 per cent during 1992-2002.


Gold on the other hand, never gave negative returns.


One should not forget that the subdued returns computed for Sensex during the above period are due to the bearish mood prevalent in the equity market, which may not last perpetually.

The study also showed that out of the 21 pairs of 10year moving averages, gold has given returns in double digits only five times, against 17 times given by equities as surrogated by Sensex.


Moreover, if you calculate the CAGR (compounded annual growth rate) from 1981 till date, the average returns provided by domestic gold is 9.65 per cent, just able to beat inflation, whereas, the average returns provided by equities are far higher at round 15.72 per cent, almost 1.6 times of the returns provided by domestic gold in he same period.

Future of gold: Gold may continue to provide super returns compared to Indian equities if the dollar keeps on appreciating against the rupee.


So what should you do?


Every asset class has its own period of performance.


Gold has performed spectacularly in the past five years to become a favoured asset class. However, gold does not have an intrinsic value and its value is dependant on the performance of other asset classes. Therefore, you should not invest more than 10 per cent of your investible corpus in gold.

The solution is diversification and creating a diversified portfolio with investments in debt, equities and gold, added Bhatia. If you want to invest for wealth creation, gold is not the asset class in which you should invest your major money. However, part of the investment can be made in gold for portfolio diversification. This investment should preferably be held in electronic form through various avenues like gold ETFs, gold funds or e-gold of NSE.

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