It is the nature of markets to boast about huge investment opportunities in any asset class when it gives good returns. Just five days ago, gold prices reached an all-time high of Rs 67,450 per 10 grams rising Rs 1,130, following strong global trends. In one month, gold marked its fourth historical high, sparking as usual another new buzz around gold investments, with every self-proclaimed fin-expert on social media praising gold's prospects. Sebi Registered Investment Advisor, Brijesh Vappala, said, “Whenever gold touches peak values, there is a lot of buzz on why you should not ignore gold in your portfolio. This is often accompanied by the superlative last one or two-year returns as well as how gold acts as a hedge against other classes.” But is it true? Let's save the hedging part for later and consider the claim of returns first.
We will compare gold against another class of asset which is touted to have the same or more level of stability- government bonds. If we take only the last year, gold boasted an impressive 11.71 per cent return, it is even 14.57 per cent if we take five years' returns. Yet, one should be careful here because it is since 2020 that it touched record highs, and then scaled higher. So, one should look beyond that.
On March 26, 2024, the gold only yielded a 10-year return of 7.43 per cent when debt mutual funds, predominantly investing in government securities, delivered a commendable 9.64 per cent as per Value research data. In the last 15 years, gold delivered only 8.99 per cent returns.
For calculating returns from debt, we have taken a debt mutual fund that invests 99.11 per cent investment in long-term government securities. It has delivered 9.64 per cent in the last 10 years higher than gold's 7.43 per cent in 10 years. To illustrate 10-year returns of purely long-term government bonds, the CCIL All Sovereign Bond Index shows an 8.83 per cent return. Now the next major argument for gold proponents is the yellow metal's hedging value.
True, gold has the potential to act as a safeguard against inflation, and hedge against inflation outperforming Nifty 50 during high inflation periods. High inflation has generally correlated with lower equity returns. On the other hand, over the long term, gold acts as an efficient hedge against inflation. But the catch lies in the allocation, Brijesh pointed out.
"To truly get the hedging potential of any asset, a significant portfolio allocation, around 30 per cent, is required. However, a retail investor when thinking of investing in gold is thinking in terms of 5 per cent or 10 per cent. This meagre allocation does not move any needle in the portfolio since the other 90 per cent is anyways in other classes,” Brijesh said.
"Due to paltry returns of 7.43 per cent in 10 years, a retail investor cannot afford to have a 30 per cent allocation in gold. Also, it is not tax efficient for them to tactically move in and out of gold to take advantage of its fluctuations," Brijesh added. If you choose to sell your Sovereign Gold Bonds (SGBs) within three years of acquiring them, Short Term Capital Gains will be charged at 30 per cent, along with any applicable surcharge and cess. On the other hand, STCG for Gold ETFs attracts tax based on your tax slab.
In August 2020, the price of gold soared to an all-time high. It was a time when equities had failed to deliver promising returns due to the Covid pandemic. The surge in gold prices would have convinced you to invest in the bullion as a more profitable option. Gold had then even outperformed government bonds. But since then the prices have slumped. It was about mid-2022 when gold regained its lost value comparatively. On the other hand bond prices are more stable with its return graph not staying dipped for more than 3 months since 2020.
Ajay Pruthi, another Sebi RIA and founder of PLNR said, “Gold can be highly volatile like stocks and does not offer rewards commensurate with its risks. If you are a retired individual you require a steady income, which gold cannot provide due to its unpredictable price fluctuations. It is more volatile than the broader market, with fewer indicators to forecast its movements."
Pruthi also warned it is prone to extended periods of decline. "While the stock market might dip briefly during a recession, it usually rebounds as the economy improves. However, gold can lose value and may take years to regain its previous levels," Pruthi said. For instance, the value of gold was lost in mid-2013, and it took long 6 years to recover to reach the same level.
"While some gold holdings are suggested for their counter-cyclical traits, bonds offer similar benefits without the instability,” Pruthi shared his view.
Sudheer M, another Sebi RIA, also has a similar view and further underscores the practical challenges of any type of investment in gold. Sudheer M, a Sebi Registered Investment Advisor is also of the same view and further shares Sudheer said, "Contrary to popular belief I feel that gold is more volatile than equity. Due to India's unique consumption pattern, the volatility gold shows in the global market is not visible in India to the same extent."
"I do not consider gold as an investment class. However, if you are very particular that you want to gift gold to your child during their marriage, it's better to give it as Gold ETF or Sovereign Gold Bonds. Even buying gold as an ornament is not a good idea as when you try to sell it, almost 30 per cent of its value will be lost. Storing gold is also very risky, as seen in the recent incident in Maharashtra when gold was stolen from bank lockers. Unless you have a certificate from the valuer and photographs of the gold you store in the locker, it's difficult to recover it even if the police catch the gold from the culprit," Sudheer concluded.
