Gold Beat Nifty Returns in the Long-term as well. Should you Invest now?
MAS Team | 03 April 2020
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The turmoil in equity markets, along with a surging credit risk crisis in the debt markets has shaken investor confidence. As the equity and debt markets turn risky, investors have begun to seek protection through purchases of gold.
The UTI Gold ETF, which boasts the closest tracking to physical gold prices, had surged 37% in the financial year ended 31 March 2020. Comparatively, the Nifty 100 total returns index had lost 25% in the same period.
Clearly, there is a growing demand for the shiny yellow metal. Besides, if we check the historical data from FY2007-08 to FY2019-20, we see that gold prices tend to shoot up during times of financial crisis or market corrections.
The wide divergence in the prices exhibits an inverse relationship between the two asset classes.
In the past 13 financial years illustrated in the chart above, gold has beaten equities in terms of returns. UTI Gold ETF grew at a rate of 11.72% per annum in this period, whereas Nifty100 TRI grew at 8.19% pa. Even when the equity markets were buoyant a few months ago, the returns of gold were nearly at par with equity indices.
The reason behind the surge in gold prices is more nuanced. Domestic gold prices are determined by two major factors – international gold demand and supply priced in U.S. dollars and the USD/Indian rupee exchange rate.
In dollar terms, gold has appreciated only at 6.44% p.a. from April 2007 to March-end 2020. But the Indian rupee has depreciated against the dollar at 4% pa in the same period. This combination is the reason why domestic gold prices have delivered double digit returns in India.
Does this make gold a safe haven for investors?
The discussion here is only related to financial gold instruments, which are backed by physical gold, and we are not discussing about gold jewelry. Easily trade-able gold securities have set a precedent in financial markets to act as safe haven. Other such safe havens are hard currencies such as the U.S. dollar and currencies of financially strong economies.
In difficult times, asset managers use safe havens as a way to protect their capital and gains. Speculators, too, ride on this wave to achieve some gains. A combination of these two, along with the demand for consumption, has helped push gold prices.
Considering these dynamics, gold, in its financial avatar, cannot be considered as an investment. If you have gold jewelry at home, or have invested in gold ETFs for the purpose of buying physical jewelry in the future, then that is fine. But over and above it, gold does not have any importance in the portfolio.
On the other hand, although equity returns have sobered to fixed income product levels, we should not undermine the volatility of this asset class. The volatility, which is sharp fluctuations in the stock prices, can be used to one’s advantage to boost overall returns. Sharp fall in stock prices allow investors to buy stocks or equity fund units at a cheap value. The price rally that follows compensates for the risk taken.
If compared fairly, gold is the more volatile alternative to fixed income instruments, without having any credit default or interest rate risks.
Dear Investor,
In case of any grievance / complaint :
In case of any grievance / complaint :
- Please contact Compliance Officer Pankaj Raheja at [email protected] and Phone No. - 91-22-35131664.
- You may also approach CEO Debashis Basu at email- id [email protected] and Phone No. - 91-22-35131664.
