Does gold’s underperformance and short bursts of price rise help its long-term returns
With a 5.7% CAGR (in rupee terms) over the past 10 years, gold has turned out to be last decade’s underperformer. In stark contrast, the Nifty has delivered a return of 15.5% over the past decade. Much of this underperformance stems from the fact that early 2012 marked a peak in a multi-year bull run in gold. Nippon India ETF Goldbees (then Benchmark GoldBeES) was launched as India’s first Gold ETF in March 2007. From launch till 1 January 2012, the ETF zoomed by 23.8% CAGR (compond annual growth rate). The subsequent 10 years marked a slow stagnation in gold, with a few smaller cycles of rising prices such as 2019-20. In the past year, gold’s return is actually negative at -4.3%. Many commentators believe that in the long term, gold is a hedge against inflation. This is true, but only just.
Gold’s returns in rupee terms over the past 15, 20 and 25 years are 11.6%, 12.4% and 9.4% CAGR, respectively. How does this square up with gold’s recent poor performance? The answer is that gold has long spells of underperformance and short bursts of rising prices that allow its long term returns to stay relatively high. These bursts often occur after long spells of stagnation. There is thus a case for the current spell of underperformance to revert to gold’s long term average return of 9-12%. Our experts give their views on whether one can tactically invest in gold in current conditions.
Gold can be a hedge against covid-related uncertainties
— Kirtan Shah, founder and chief executive officer, Credence Wealth Advisors
For us to be able to understand gold investing, we first have to understand what moves gold prices. For all practical purposes, it’s the negative real rate that moves gold. When inflation is higher than the prevailing interest rates, you have a negative real rate environment. If rates start to go up or inflation starts falling; it can be theoretically negative for gold prices.
Everything seems to be working against gold but this year it can still be a decent bet because of the uncertainties around covid and its impact on supply chain resulting to higher inflation. Equity market valuations were justified with low rates but with rates increasing if earning are not keeping pace, investments may move from risk assets to gold. Global central banks have been adding to their gold purchases to incrementally diversify from dollars. With gold returning negative for 2021, adding gold to the portfolio may bring in the necessary hedge.
Buy gold systematically rather than taking tactical call
–Salonee Sanghvi, founder and CFA, Mywealthguide.com
Gold is mainly used as a store of value, to preserve wealth that erodes over time due to inflation and as a hedge against currency movements. Gold has always been a preferred investment option in India and though prices are determined less by demand supply of the actual metal and more by two factors – gold prices globally and currency movement of Rupee vs USD. Investing in gold caught attention as it zoomed over 70% amidst pandemic. For most people a simple debt equity portfolio allocation would suffice, but those that would like to hedge and add an allocation to gold a maximum of 10-15% can be allocated. Inflation fears globally have again increased appetite for gold. Given crisis are usually unforeseen and unpredictable, we don’t know which way gold prices would move. I would recommend buying gold systematically based on your asset allocation rather than taking a tactical call.
Gold as an investment should have an entry & exit strategy
–Amit Bivalkar, managing director and chief executive officer, Sapient Wealth Advisors and Brokers Pvt. Ltd
Observe the tipping points for the economies to overheat. In Indian context, we can see overheating via three macroeconomic indicators: credit growth, central government cash balance and system liquidity. We identify overheating when credit growth of the banking system gets back to 12%-14%, central government cash balances are being reduced closer to zero and system liquidity being withdrawn to ₹+/- 2 trillion. These numbers have a long way to go to reach these thresholds as credit growth in banking system is still at 7% levels. Government cash balances have been at elevated levels of around ₹4 trillion whilst system liquidity is still hovering close to around ₹7 trillion. The above numbers indicate that the economy still has some way to go before risks of interest rates, inflation and currency collectively play out to disturb the optimism on economic growth. Gold as an investment should have an entry & exit strategy.
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