Fiscally Fit
Verdict on gold
SHYAM P.
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All that glitters is not gold…but is the glitter of gold worth it?
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India is among the largest consumers of gold in the world. The majority of retail gold consumption is in the form of jewels. Although Indian women don’t need a reason to go gold shopping, the core logic used by men to justify all that yellow metal consumption is the notion that gold is a “solid asset” with appreciation potential.
The recent bull run in gold, as with the other commodities, stirred up much interest among the junta — what with banks and financial institutions touting that the best returns are waiting to made. The drop in the Sensex further fuelled the speculation in gold thanks to the reorientation of friendly neighbourhood brokerage houses who quickly came up with “buy” signals for the bullion market. While banks and finance companies started selling gold coins, mutual funds played one-upmanship by launching “Gold funds” that would invest in gold mining companies! What an idea!
Logic of returns
When all this was happening, I was defending criticism from the missus for not believing in gold as an “investment avenue”! The logic was simple — convert all my stock holding to gold (ornaments, biscuits or coins) and we would become richer than ever as gold appreciates in value!
Now that the metal has fallen quite sharply (as is the case when so much tension and hype builds up around anything), I thought it was time for me to settle the score about the real potential of gold as a long-term investment option.
I set up a simple experiment to calculate the returns from gold over the last twenty years and compared the same with the returns from BSE Sensex (Proprietary Stock Index of the Bombay Stock Exchange, computed based on the share price of underlying 30 stocks).
Over the last 20 years “gold” as an asset class has generated significantly lower returns compared to equities, notwithstanding the stock market crash. As measured by the Sensex, equities have given investors a return of 17.1 per cent p.a. in comparison to gold’s return of 9.3 per cent p.a.! This means that over the last 20 years, Rs. 100 invested in the Sensex would have grown to Rs. 2,350 while in the case of gold it would have become merely Rs. 592.
Not a good investment
If one includes the dividend payout and tax benefits of equities — gold would further lag behind as an alternative investment vehicle. In addition to the opportunity cost of not investing in a better performing asset class such as equities, those who invest significant amount of capital to buy gold in the form of ornaments would face depletion of 10-15 per cent in terms of total value due to making charges, wastage etc., as a result turning gold into more of an expense than a strong investment.
The verdict is clear. Gold is for fashion…if you want to build wealth look elsewhere. As to the credentials of mutual funds that invest in gold mining companies — I have no comments as yet. For the curiously minded, the gold price and Sensex data culled from various sources is presented in the enclosed table. Of course, the cynic may still doubt my judgement for its basis on historical data, which may not replicate itself in the future, but I would bet my money on 20 years of data rather than the glittering prospect of gold in the future.
This is a fortnightly column on personal finance. Email your queries to shyamscolumn@gmail.com
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