In India, bling is the only king. The women want more of it in their jewellery, the wise advise saving it for the bad times and rich offer it to god so that they can stock up more. The truth is we just can’t do without gold. Despite the government begging them not to, Indians went on splurging on the yellow metal. In 2013, more than 900 tonnes of gold was bought in India with 88.3% imported. The more, the merrier.
Gold, in fact, is the mother of all savings that even your mother would agree to that. After the global financial crisis in 2008 when governments across the world borrowed to stay afloat and currencies took a hit, people flocked to gold for rescue. It is a safe metal beyond doubt.
The last 15 years saw inflation playing truant with your savings. Consumer price inflation averaged around 9% during this period, trimming kitties but gold returns didn’t lose their sheen. Gold prices, according to World Bank data, have grown more than 16% annually in the last five years, way above the average inflation of 10.4% (consumer price index).
| Date | Price per ounce in (Rs) | Price per 10g (in Rs) | Absolute return% | CAGR % |
| August 2007 | 27,161.7 | 9,818.4 | ||
| August 2014 | 78,909.9 | 27,834.67 | 183.495 | 16.05 |
CAGR =Compound annual growth rate
Sounds good to be true?
Well, not exactly. Gold is not that shiny these days. Gold returns in India, the world’s second-biggest buyer, last year was a dismal negative 3%. Internationally, it scored a negative 20% in the same period. Even in the good old days, it wasn’t shining that great. From 1981-1986 and 1991-1999, gold return was just 1.98 per cent and 1.61 per cent, respectively. If your father had bought gold for the long term, say 20 years (1979-1999), his stock would have made an abysmal return of 5.50% CAGR.
Now switch to 2014. A quarter drop in local gold prices has made Indians rethink the fate of the metal in their portfolio. Equities, in fact, have scored better, largely on the hope of acche din promised by Prime Minister Narendra Modi. If you are a long-term player, then you shouldn’t be so sold on gold.
The metal at best can be used as an inflation hedge. The returns from gold lag behind assets like equity in the long run.
Let’s suppose you father decides to back your finances up when you turn 35 by investing in gold. So he starts investing in the shiny metal in1979. On your 35th birthday, your father’s investment would fetch you a return of 10.90%. Now, if you factor in inflation at 9%, it would come up to a bit more than 1%.
Now if you had invested the same thing in equities, they would have given you a return of 16.39% and when you factor in inflation, the return will be above 6%.
So does that mean I give up on gold?
No, you don’t have to. All you need to do is balance your portfolio well. Don’t do an Usain Bolt with gold. Instead, the excess allocation should be moved to other classes like equity or debt. When there is a good appreciation in gold prices and the value outshines the limit, consider booking the gains.
You can invest in gold exchange-traded funds (ETFs). Compared to physical gold, they have plus points like they don’t require storage space, the pricing is transparent. They can be bought via demat accounts and are far more liquid than physical gold.
But I have assets like fixed deposits. They can give me steady returns when compared to gold. So why should all this bother me?
The interest rate on FDs hasn’t changed much over the years. In 1973-74, the rate was in the range of 6- 7.25%; now it is 8-9% per cent. Over the same period, inflation has moved from around six to over 10%, so they might be steady but it won’t help you, the depositer, that much.
Now compare that annual return from equity, which is around 16.6% over a 40-year period. Now compare your FD with gold for the same period and you will find the shiny metal gave a return of 12.3%.
Also, the interest you make on FDs is taxed at the slab rate of the individual. So if you put Rs. 10,000 in an FD at 9% interest rate, pre-tax interest earned in the year would be Rs 900. Now tax on the interest earned at 30% rate would add up to Rs 270, which means the net amount earned by you would be Rs 630, a return of 6.3%, not exactly what you thought.
FDs may not make sense if you are in the highest tax bracket and are eyeing long term gains. You could instead opt for for debt mutual fund, which despite the new changes in tax rules, are helpful.
For example, if you invest Rs 50,000 in a three-year fixed maturity plan, assuming a return of 9%, you would earn Rs 65,302. At 9% inflation,the index value will come to Rs 64,750. The taxable amount will come to Rs 552 and the tax payable would be Rs 110. If you invested the same amount for the same period in a bank FD, you would have to pay a tax of Rs 4,590. Bank FDs are ideal for the risk averse in low tax brackets such as 10 or 20%. If you want to gain well for the long term, you should ideally keep a balance in your portfolio with debt and equity with a little bit of gold for topping.