Wednesday, April 25, 2012

Should you buy more gold than stocks?

Indians do not need the excuse of Akshay Tritiya (considered auspicious for gold buying) to stock up the yellow metal. For generations, festivals, weddings and other auspicious occasions have warranted some gold purchase for us. The only novelty now being the availability of Gold ETFs and e-gold that one can buy through the demat account. The increased awareness about the inflation adjusted returns from gold has made it all the more alluring to retail and institutional investors of late. Top that with regular dose of opinions from commodity gurus like Jim Rogers, bankers and economists about the scope of outperformance of gold over other asset classes. The demand for gold from India has become so important that the same is now considered a key determinant of global gold prices.

Meanwhile, central banks in the US and Europe are not yet done with their money printing exercise. Hence, concerns over runaway inflation are far from being quashed. In such a scenario no asset class other than gold can offer the safe haven security for wealth conservation. There are even talks about some troubled countries moving back to the Gold standard due to the depreciation in their currency value. So is gold the best asset class to invest in?

As per statistics from a business daily, over the last 10 years, the annualized returns from gold has been 6 times that from US stocks (considering Dow Jones index). In fact the returns from gold outperformed stocks over a 50 year period as well. However, if one considers a 30 year period, the returns from stocks were much better than gold. Hence the returns purely depend upon the level of inflation, performance of the economy and corporate over a given time period. Companies in America may fail to keep up with the rise in the value of gold over the next decade. This is given the fact that currencies like the US dollar and the euro may lose value thanks to the excessive money printing.

However, for Indian investors the considerations could be very different altogether. For one, the central bank is extremely conservative about liquidity management. Plus despite relatively lower GDP growth, companies will continue to sustain good inflation adjusted profit growth. Hence the scope for returns from good stocks is much higher than in the US. No doubt the inflation adjusted returns from gold can add value to an Indian portfolio as well. But be in no doubt that there are several stocks that have the same virtue. Hence, take the stunning statistics about the outperformance of gold over stocks over a long period in the US with a pinch of salt. We believe Indian investors would be better off keeping their exposure to the yellow metal limited. In fact a larger proportion of good quality stocks than gold would do much more than keeping your portfolio inflation proof.

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