Gold, just Gold!!

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The ready-to-go Investment for Indian households, whether it is any festival or any event at home. (And they're actually right in doing so.)

Influenced by Fin-influencers, I used to think of Equity/Mutual Funds as a much superior investment over gold, but the recent hike in gold triggered me to dig a little deeper, and here are my findings:-

[1] First and most important - Returns

I compared the returns of Nifty and Gold from 2001 till date - and those are 13.75% and 13.14% respectively. Yes, Nifty CAGR% is higher, but does it justify the Risk Premium?

On a side note, the returns largely depend on the timing of investment, as a result of the inverse relation between Equity and Gold in the short term, which we'll be discussing in the later part of the post.

[2] Risk

Historically whenever there's uncertainty in the world economies, from the 2008 financial crisis or COVID-19, Gold gets a boost up and Equity markets start rolling down making unprecedented lows. But But But, whenever there are good times after the uncertainties/crashes, Equity markets get a boost up but gold doesn't roll down as fast as equity, either it consolidates or falls comparatively less.

(During Covid, Nifty nearly halved and Gold surged up by ~49%, but after covid Nifty crossed its previous highs and Gold slumped just ~12%.)

This brings us to the conclusion of high volatility of Equity Markets, leading to higher risk.

[3] Timing

As discussed above, there's an inverse relation between Gold and Equity, after a recession/crash is over, equity markets rebound and gold slides down and vice versa in excessive boom resulting into a bubble. 

"Now it's up to you to predict the timing of your investment, when you think there's a bubble or a recession is over."

(For example:-

Investment in May 2007 (bubble peak) to July 2022, CAGR would be:-

Nifty50 - 9.2% p.a.

Gold ETF - 11.2%

Investment in Jan 2009 (Recession end) to July 2022, CAGR would be:-

Nifty 50 - 13.40%

Gold ETF - 7.91%)

As a result of the findings, It makes sense to start SIP for SGB as well along with Mutual funds/ETFs, to have a balanced diversified portfolio.

During my research, I also learned about the relationship between Inflation, Exchange rates, commodity (gold) prices, and Equity prices.

(For eg. In the last 23 years, Gold in India has increased by a CAGR of 13.14% whereas in the US it is 10.06%. The resultant difference is because of the Rupee depreciation of ~2.5%, which is because of the Inflation difference between the US and India) 

Recommended:-

"Gold Price Vs Stock Market: Gold and Equity Have an Inverse Relationship" by Get Money Rich (An amazing article covering the topic mentioned)


Disclaimer: The post is for educational purposes only.

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