With 5.7% CAGR (in Rupee terms) over the last 10 years, Sleep The last decade has turned out to be an underperformer. In contrast, Nifty has given a return of 15.5 per cent in the last one 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 to January 1, 2012, the ETF grew at a CAGR of 23.8% (compounded annual growth rate). The subsequent 10 years saw a slow stabilization in gold, with few short cycles of rising prices like in 2019-20. Gold returns have actually been negative at -4.3% in the last one year. Many commentators believe that in the long term, gold is a hedge against inflation. True, but just fair.
The returns of gold in rupee terms in the last 15, 20 and 25 years are 11.6 per cent, 12.4 per cent and 9.4% CAGR respectively. How does this match up with the recent poor performance of gold? The answer is that gold has underperformed over a long period of time and the low bounce of rising prices allows its long-term returns to remain relatively high. These eruptions often occur after a long period of pause. Thus, for gold to return to the long-term average yield of 9-12%, there is a case for the current poor performance. Our experts give their opinion on whether one can wisely invest in gold in the current circumstances.
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Gold can be a hedge against uncertainties related to covid
, Kirtan Shah, Founder and CEO, Credence Wealth Advisors
To be able to understand gold investing, we must first understand what triggers gold prices. For all practical purposes, it is the negative real rate that propels gold. When inflation is higher than current interest rates, you have a negative real rate environment. If rates start rising or inflation starts falling; This could theoretically be negative for gold prices.
Everything is working against gold, but this year it could still be a good bet as the uncertainties around Covid and its impact on the supply chain have led to high inflation. Equity market valuations were justified with lower rates, but with an increase in rates, if earnings are not keeping pace, investments may shift from riskier assets to gold. Global central banks are increasing their gold purchases to diversify from the dollar. With gold’s negative returns for 2021, adding gold to the portfolio may be the necessary hedge.
Buy gold systematically instead of making strategic decisions
– Saloni Sanghvi, Founder & CFA, Mywealthguide.com
Gold is primarily used as a store of value, to preserve assets that are destroyed over time due to inflation, and as a hedge against currency movements. Gold has always been a preferred investment option in India and although prices are less determined by the actual demand and supply of the metal, it is determined by more than two factors – gold prices globally and currency movement in Rupee versus USD. Investment in gold grabbed attention as it surged over 70% amid the pandemic. A simple debt equity portfolio allocation will suffice for most people, but those who want to hedge and have a maximum allocation of 10-15% in gold can be alloted. Global inflation fears have again increased the appetite for gold. Given that crises are usually unpredictable and unpredictable, we do not know in which direction gold prices will move. I would recommend buying gold systematically based on your asset allocation rather than making strategic decisions.
Gold as an investment should have an entry and exit strategy
–Amit Biwalkar, Managing Director and Chief Executive Officer, Sapient Wealth Advisors & Brokers Pvt. Ltd.
Observe tipping points for overheating economies. In the Indian context, we can see overheating through three macroeconomic indicators: credit growth, central government cash balance and system liquidity. We identify overheating when credit growth of the banking system returns to 12%-14%, central government cash balances are being reduced to near zero and system liquidity is being withdrawn +/- 2 trillion. These numbers have a long way to go to reach these thresholds as credit growth in the banking system is still at the 7% level. Government cash balances have been at an all-time high of around 4 trillion, while system liquidity is still hovering around 7 trillion. The above numbers indicate that the economy still has some way to go before interest rate risks, inflation and currency play collectively to upset optimism on economic growth. Gold as an investment should have an entry and exit strategy.
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