Which is a better investment, Gold or Equity?

Which is a better investment, Gold or Equity?

India is the world’s largest consumer of Gold. Indian consumers hold over USD 1 Trillion worth of Gold. Our fascination for Gold is never ending. Just as a part of an American’s dream is to own a home, the dream in India is to own as much Gold as possible.

Gold jewellery in India is considered as wearable wealth, financial security and of course a fashion statement. India’s love for Gold is as old as its culture! Of late it also has become a major asset class for investment. So it is important to see how Gold has fared historically compared to equities.

The chart below has captured the value of an investment of Rs. 1 lac made in 1978-79 in Gold and the same amount being invested in the BSE Sensex. The chart throws up startling facts!

GOLD VS SENSEX
From 1979-80 to 2011-12
Sl. No.	Year	Gold Price (10 grams)	Gold Return %	Value of Rs. 1 lac invested in Gold	Sensex	Sensex Return %	Value of Rs. 1 lac invested in Sensex		Value of investment in Sensex minus Gold
BASE YEAR		791		1,00,000	100		1,00,000
1	1979-80	1,159	46%	1,46,451	129	29%	1,29,000		-17,451
2	1980-81	1,522	31%	1,92,417	173	34%	1,73,000		-19,417
3	1981-82	1,719	13%	2,17,281	218	26%	2,18,000		719
4	1982-83	1,723	0%	2,17,707	212	-3%	2,12,000		-5,707
5	1983-84	1,858	8%	2,34,887	245	16%	2,45,000		10,113
6	1984-85	1,984	7%	2,50,742	354	44%	3,54,000		1,03,258
7	1985-86	2,125	7%	2,68,632	574	62%	5,74,000		3,05,368
8	1986-87	2,323	9%	2,93,659	510	-11%	5,10,000		2,16,341
9	1987-88	3,082	33%	3,89,579	398	-22%	3,98,000		8,421
10	1988-89	3,175	3%	4,01,307	714	79%	7,14,000		3,12,693
11	1989-90	3,229	2%	4,08,146	781	9%	7,81,000		3,72,854
12	1990-91	3,452	7%	4,36,228	1,168	50%	11,68,000		7,31,772
13	1991-92	4,298	25%	5,43,165	4,285	267%	42,85,000		37,41,835
14	1992-93	4,104	-5%	5,18,650	2,281	-47%	22,81,000		17,62,350
15	1993-94	4,532	10%	5,72,770	3,779	66%	37,79,000		32,06,230
16	1994-95	4,667	3%	5,89,879	3,261	-14%	32,61,000		26,71,121
17	1995-96	4,958	6%	6,26,577	3,367	3%	33,67,000		27,40,423
18	1996-97	5,071	2%	6,40,872	3,361	0%	33,61,000		27,20,128
19	1997-98	4,347	-14%	5,49,414	3,893	16%	38,93,000		33,43,586
20	1998-99	4,268	-2%	5,39,420	3,740	-4%	37,40,000		32,00,580
21	1999-00	4,394	3%	5,55,289	5,001	34%	50,01,000		44,45,711
22	2000-01	4,474	2%	5,65,405	3,604	-28%	36,04,000		30,38,595
23	2001-02	4,579	2%	5,78,742	3,469	-4%	34,69,000		28,90,258
24	2002-03	5,332	16%	6,73,942	3,049	-12%	30,49,000		23,75,058
25	2003-04	5,719	7%	7,22,801	5,591	83%	55,91,000		48,68,199
26	2004-05	6,145	7%	7,76,697	6,493	16%	64,93,000		57,16,303
27	2005-06	6,901	12%	8,72,142	11,280	74%	1,12,80,000		1,04,07,858
28	2006-07	9,240	34%	11,67,857	13,072	16%	1,30,72,000		1,19,04,143
29	2007-08	9,996	8%	12,63,317	15,644	20%	1,56,44,000		1,43,80,683
30	2008-09	12,890	29%	16,29,097	9,708	-38%	97,08,000		80,78,903
31	2009-10	15,756	22%	19,91,366	17,527	81%	1,75,27,000		1,55,35,634
32	2010-11	19,227	22%	24,30,055	19,455	11%	1,94,55,000		1,70,24,945
33	2011-12	26,520	38%	33,51,786	17,404	-11%	1,74,04,000		1,40,52,214
CAGR FOR LAST 33 YEARS			11.22%			16.92%
Dividend yield (DY) is not part of the Sensex returns.
Assuming only 1% CAGR of DY, the Sensex CAGR for the last 32 years is								17.92%
As on 31st March 2012
Rs.1 Lac invested in Sensex 33 years ago is Rs.1.74 crore.
Rs.1 Lac invested in Gold 33 years ago is Rs.33.52 lac today.
By the way……....Rs.1 Lac kept under your pillow 33 years ago is worth approximately Rs.7,000 today.

Historical Data:

The BSE Sensex delivered an annualized return of 16.92% in the last 33 years (since inception). So Rs.1 lakh invested in Sensex 33 years ago is now around Rs.1.74 crore.

Assuming a dividend yield of a paltry 1% per annum, the annualized returns work out to 17.92%. Adding the above dividend yield, the corpus would be Rs.2.29 crore.

If a 2 % annual dividend yield is assumed then the corpus would be Rs. 3.04 crore and a dividend yield of 3% per annum would have grown the corpus to Rs. 4.00 crore today!

The annualized rate of return for Gold is 11.22%. So Rs.1 lakh invested in Gold 33 years ago is worth Rs.33.52 lakhs today.

The Commodity Cycle:

International Gold prices saw a severe crash for over two decades beginning 1980. In India we did not feel the impact because rupee depreciated a lot during the same period.

Gold prices fell from USD 892 per ounce in 1980 to USD 272 in the year 2000. That’s a fall of around 70% over a 20 year period. Then why were Indian Gold prices Rs. 1,159 (per 10 grams) in 1979-80 and Rs. 4,394 in 1999-2000?

Well, Gold prices fell 70% but the rupee depreciated by 470% in the same period. So the gain in the Indian market while prices fell globally was due to the appreciation in the value of the USD compared to the rupee. This created an illusion that Gold prices never fall.

Commodities have longer cycles. On an average a commodity bull market lasts more than a decade and a commodity bear market lasts nearly two decades. Unlike commodities like Gold which have longer cycles stock markets usually have shorter cycles. This creates an illusion that the Gold prices are more stable than the stock markets. In stock markets the recovery also may be faster but in Gold the recovery may be longer.

Globally it took 27 years to get the same price for Gold. The highest price reached in 1980 (USD 682 per ounce on 1st October 1980) was again touched only on 15th May 2006. Zero return for almost 27 years!

Warren Buffett’s view:

Warren Buffett’s annual shareholder letter is an eagerly anticipated treat for the financial community. An extract from his letter for 2012 is reproduced below. This gives us a peek into the mind of the legendary investor’s as far as investment in Gold as an asset class is concerned.

“The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is Gold, currently a huge favourite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful).

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, Gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production.

Meanwhile, if you own one ounce of Gold for an eternity, you will still own one ounce at its end.

What motivates most Gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices.

In these bubbles, an army of originally sceptical investors succumbed to the "proof” delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."