It glitters but also fritters….

Indians have a tradition of buying gold, it is almost a borderline obsession. We import about 1 ton of gold every year!!!, and this is mostly for jewellery or to be stored. It has become a national problem as the wealth is stored away and is not being utilized to create more wealth. For instance money put in a bank will be lent to someone who can use it to generate wealth (run a factory, build houses etc.,), the investor also gets a part of the benefit as interest, whereas this does not happen with gold. Government is trying to change this through gold deposit initiatives etc.

Gold is an excellent store of value, but is not a wealth creator. Gold has done extremely well in terms of retaining value, especially in recession years. If one is looking to build wealth then gold may not be the key vehicle of choice, as it significantly under performs in growth years.

Gold Slide1

Let’s look at how gold has fared over the last couple of decades.  In 1994 gold was Rs 430 a gram and now it is close to Rs 2,730, it has returned an impressive 9% per year. You can realize this in return if this is held in ETF or as gold bars. If this is held as Jewellery most of this gain and a bit more will go into the various charges and at best one can realize 1% to 2% returns, which are is poor by any standards. On an average the return on gold underperforms the market index.

We recommend

  1. If one is more than 10 years away from retirement and is looking to build wealth, then gold should be a maximum of 10% of the portfolio. (we prefer 5%).
  2. If one is retired or much closer retirement they could have upto 20% of their assets in gold (as a protection from a severe downturn).
  3. We suggest purchasing GOLD ETF as opposed to Jewellery, as this is more liquid and has tax advantages.

 

Happy investing..

 


 IndusWealth: Making your money work for you

 

About Praveen Reddy

http://in.linkedin.com/in/praveenreddyinduswealth

5 Comments

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  1. LVP Garu

    1) Seems Nifty has not been adjusted for dividends gain. (roughly 2-3% more)
    2) Cherrypicking the timeframe always highlight the conclusion disproportionately. (Remember the recent ET PPF returns article).

    • Yes Nifty is a bit higher (about 1.5% more).

      Couldn’t agree more on cherry picking dates, but that article about PPF was a very surprising.

      The argument about gold can be made with US data as well where a lot more history of market performance is available. The key point is the economic reason, we are a developing country and we will be better off deploying our wealth for economic benefit. Doing so is not only patriotic but also profitable.

      Regards
      Praveen Reddy
      Principal Advisor
      http://www.induswealth.com

  2. Can’t agree more on opportunity cost of gold hoarding. 15,000 MT of gold is lying with out any economic value add. that is 2X US Fed Gold reserve or 30X RBI’s reserve. Desai tried his bit but became hugely unpopular. In India, you can never win an argument against gold, especially with house captains.

  3. Indians always favour gold since it always in our hands and quickly can be capitalised unlike shares.. As dots can always be connected backwards, it’s good to see gold return is less but we cannot change the trust in gold since it’s in our hands rather virtual value.

    • I agree it is very difficult to change believes, but all value is virtual. Currency is a promise from RBI, stock is collective belief about value of a firm, so is value of gold. A thing is worth what the buyer is ready to pay.

      Gold, Real estate, Stocks etc are all important asset classes and one should have some exposure to each of these. It should not be all exposure to any of this. As we develop our economy opportunities in equities should also be leverage to a certain extent, but only within ones comfort zone.

      Wealth can not buy us a good night’s sleep so we better not invest in products that will cost us a good night’s sleep, irrespective of the return.

      Regards
      Praveen Reddy
      Principal advisor
      IndusWealth

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