Over centuries gold has become an inseparable part of the Indian society. Not only in the form of gold jewellery, but as a tradable investment as well. Over the period from 2001 to 2014, foreign institutional investors (FIIs) invested $154 billion in Indian equity and individuals back home have bought gold worth $245 billion in the same period, according to data presented by HDFC Mutual Fund. In other words, the dollars received by India and more have been invested in gold. Does gold make a smart investment choice?

 

Over the past 13 year period described above, gold delivered a return of 14.52% while the Sensex delivered a return of 17.82%. Thus, the FIIs investment in Indian equities worked out to be better than India’s investment in gold.

 

On going further back into history, gold returned 10.6% over the past 36 years while the Sensex grew by 16.9% over the same period. While point-to-point returns will vary considerably on taking different periods as different factors affect the price of the assets, the main difference between the two is that the stocks which are represented by the Sensex can be valued based on their earnings, but there is no easy way of valuing gold.

 

Therefore, when investing in gold there is no way of estimating your returns. Stock prices will go up on profits. Real estate may go up on development and scarcity. Bank FDs are guaranteed. But how does one know the real price of gold. How much the price of gold will appreciate or depreciate depends on how much the buyer is willing to pay. There are many complex and global factors that affect the price of gold. Many buy gold because they consider gold as a safe haven or an inflation hedge. But these are all myths as they are not supported by long term historical facts.

 

 

 

 

Contrary to normal belief, gold is not an investment asset. It is a speculative asset. The key feature about gold is that it offers no stream of fixed income, unlike real estate, stocks and fixed deposits, which yield some regular returns in the form of rent, dividend and interest respectively. If you buy a product not for income but to sell it off eventually at a higher price, you are speculating. Buying gold as jewellery is fine, but buying gold for the main objective of investment should be avoided.