“All that glitters is Gold”- you must have come across this statement as it is on every TV channel and website these days. But is there any truth to it? To explain the same, we would like to present our detailed study on it.
We took the price of Indian gold from October 2005 as it was from this day that the commodity exchange started recording the prices of gold officially.
In short, we have considered the price of Sensex and Gold of 2005 as the base price for further calculations.
When there was euphoria in the equity market back in the year January 2008, at that time, the Sensex rose 2.20 times more than the price of gold.
However, due to the problem in subprime mortgages and the bankruptcy of Lehman Brothers, equity markets crashed the world over, and the fallout was seen in the Indian markets as well.
It was crisis time for equity and financial markets and during that period the yellow metal took the lead. Between the period of October 2008 and January 2009, gold prices rose sharply and the return on the investment (ROI) in gold was six times (6x) more than that in Sensex.
The dream run in gold continued till the end of March 2013 and it went to euphoric levels of Rs 33,000 from the levels of Rs 6,990 in October 2005. It delivered 1.8 times higher returns as compared to the level of Sensex.
Later in the year 2015, it witnessed modest correction up to 24,500. During that period Sensex (equity market) did well due to the strong mandate of BJP in the Lok Sabha election, however, if we compare the returns on investments for the year (2015) then the Sensex and gold both have delivered equivalent returns.
During the year 2015, the gold price came off from the highs whereas the Sensex recovered from low levels.
After several reforms and in the hope of one more strong mandate to the ruling party in the general elections, the Sensex rose to 39,000 levels in the year August 2018. It was the most outperforming asset class at that time.
Normally, equity performs better than other asset classed during the period of stability in terms of geopolitical conditions and domestic news flow. The gain was 50 percent higher than that in gold prices.
In the year December 2019 after general elections, again the Sensex did marginally better, it was 16 percent higher. Due to the tension in world markets on the basis of Tariffs, the gap between the price of gold and Sensex narrowed down.
However, due to the sudden outbreak of COVID-19, the world’s equity market tanked badly this year.
The Sensex went down and gold started moving upwards. In March 2020, the gold offered 37 percent higher returns on investment if we compare it with Sensex.
As the number of COVID-19 cases continue to rise across the world, the price of gold is also rising. It is the most uncertain time for equity or any other type of asset class.
Gold is clearly proving that it glitters in dark. At present, it is offering 35 percent returns over the prices of March 2020.
In short, golds has returned as much if not more than Sensex in the last 15 years. As equity is always associated with unforeseen events we have to have a perfect hedge of gold against it.
We feel the way countries have increased their debt level, it would keep inviting worries in the long run. Hence, it would be prudent to invest in gold.
Over the years, the spread of outperformance between gold and Sensex is narrowing but it has proven that it offers substantial returns during the period of uncertainties.
I am sure that in the coming years it will constitute its place in the list of active investments and it will be more in the DP (Depository) of investors than in lockers.
In the next 6 months, if our currency remains at current levels or depreciates then we could see the levels of Rs 55,000. Currently, gold prices are trading at Rs 49,000.
However, in case the dollar index drops and our currency starts appreciating then the upside could remain limited to Rs 52,000. In the next 10 years, based on the technical analysis we feel the gold price would double from current levels.
(The white line denotes Indian gold prices. Brown represents Sensex)
Comparison from October 2005 till June 2020.
(The author is Executive Vice President, Equity Technical Research at Kotak Securities)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.