In my ongoing series of articles about investment in gold, we have discussed various parameters that need to be kept in mind while investing in gold like its benefits and the alternative instruments to invest in the same, with a relative comparison based on different investment preferences.
In this article, let us talk about why gold is still underrated as an investment class and is normally not considered as a component of portfolio building. A major reason why gold is only seen as a mere hedge against inflation or is only bought in the form of jewelry is the belief that gold has offered low year on year returns as against the other more risky assets.
However, that is not quite the case. Mostly, we are tempted to invest or trade in risky assets such as equity shares, bonds, mutual funds or even derivatives because of the so-called knowledgeable people encouraging everyone over social platforms to invest or trade, calling it to be fairly easy and painting a very rosy picture. One is bound to get attracted to trade/invest due to the showcasing of super rates of return shown on such platforms.
But let us talk about gold, is it really that bad? Well, we know gold has a tendency to perform well, when the investors are not in a position to take risk (Risk-off mode in markets during stress times in economy), and money flows away from risky assets to safer ones like gold. Also, when inflation rises, Gold, being a commodity, increases in value and outperforms other asset classes.
An important point for all of us to understand is that after the Great Financial Crises (Also called as Sub Prime Crises) which triggered from US in around Sep 2007 and then spread over all parts of the World, the World has yet not been able to come out of the same. We have had multiple downturns in the global economic performances after the Great Financial Crises including the European Crises, US-China Trade war issue and the Covid impact being the recent one. Hence after 2007, we can safely say that the economies have been in more or less in slowdown phase and now in recession phase due to Pandemic.
Hence, one needs to see the performance of most of the risky assets (equity being the favourite) as against the performance of gold since 2007. Also over social media platforms, normally the performance of all risky assets is shown from 2003-04 because the major Increase in prices across the risky assets happened around this time and continued till December 2007.
So, let us take a look at how the overall performance of Gold has been as against the Market Index (Here Nifty 50 has been considered) during both the above considered periods.
Gold prices have been considered in USD/ounce terms because in Rupee terms, we have seen a major depreciation in Rupee as against Dollar which also contributes to the increase in prices of gold in India without actual appreciation in gold at times.
Well, the stats speak volumes for themselves. While NIFTY has managed to return only 166% since the trigger of the Great Financial crisis, gold has actually performed slightly better. Even if we see the data for the period before the bubble burst, starting from 2003-04, gold has delivered almost equal returns.
Therefore, it can be safely concluded that gold as a separate asset class is still quite underrated among our young generation. We need to understand that gold is not only something to be bought in the form of jewelry for auspicious occasions but also as an important component of our personal portfolios, serving the dual purpose of earning decent returns and safeguarding a part of portfolios against violent market fluctuations and possible inflation.
No need to wait any longer, people rebuilding their portfolios should definitely allocate a certain percentage towards gold, through any of the alternatives discussed in our previous articles.