If it glitters, it is gold. This couldn?t be more true, given the precious metal?s recent spectacular run from sub-$1,000-per-troy-ounce-level in the international markets to record highs of over $1,055 per ounce. The metal has jumped by around 20% this year, and after this week?s massive rally, is all set to record its ninth consecutive yearly gain. In a span of just days, the metal first crossed the $1,000-mark and then topped its all-time record of $1,034 per ounce.
Though opinion is still divided as to whether the metal would sustain its current rally?on Friday it lost some ground as the greenback moved up?its appeal as an alternative investment option remains unchallenged.
But, has the metal outperformed stocks, another major assets class, in giving returns? The answer is not exactly, as equities have historically performed better than gold, barring minor aberrations here and there.
In India, the world?s largest gold consumer and with one of most well-performing stock exchanges, a rupee invested in gold bars in 1998-99 would have given a return of around Rs 197 in 2008-09. This means, in 10 years, investment in 10 gm of gold bar in India would have risen by 197%. Around the same time, one rupee invested in the BSE sensitive index would have given a return of around Rs 345 by 2008-09.
In other words, stocks have outperformed gold for most of the last decade, albeit minor aberrations like in 2002-2003 and 2001-2002 when the return on the BSE Sensex was less than that on gold.
In 2006-07, RBI data shows that 10 gm gold prices in Mumbai rose around 34% as compared to last year while the 30-share BSE Sensex rose 48.3% as compared to the previous year. Similarly, in 2005-06, gold prices in Mumbai spot markets rose 12.3% as compared to the previous year, but the BSE Sensex climbed around 44.2%. In other words, in all these years, investment in stocks would have given a layman better returns than in gold.
Experts believe that a big reason for this was that the years 2005 and 2006 were marked by high GDP growth rate in India that propelled stock markets to dizzying highs.
Even a data from the World Gold Council (WGC) shows that in the last five years, returns on the main 200 stocks listed in the Bombay Stock Exchange (BSE) have grown at an compound annual growth rate (CAGR) of around 24% while investments in gold in rupee terms have grown at a CAGR of 19.8%.
However, the big turnaround came in the last three years. WGC data shows relative performance of gold was better than BSE-200 index. In the last three years, investments in the BSE-200 index have risen by a CAGR of 12.3% while that in gold have risen 17.1%. In the last one-year, investment in the BSE-200 has slumped 6.3% while that in gold has risen a whopping 14.9%. In other words, the traditional theory that stocks and equities outperform gold is being slowly breaking down in the last couple of years.
Market watchers believe that as the global economic slowdown dragged down equity markets across the globe, investors shifted their focus towards gold as an alternative and far safer asset-class. A big investment tool for prospective gold investors has been exchange-traded funds (ETF). In this recent rally too, data shows that gold holdings of major ETFs rose as prices rallied, a pointer that investors were lapping on to the tool to enter the gold bandwagon. On October 7 ? the day gold breached the earlier record of $1,034 per ounce ? holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by the metal, stood at 1,109.314 tonne, up 0.8% or 8.8 tonne from the previous business day. WGC data shows that in the first quarter of 2009, demand for gold in ETFs and similar instruments was at a record high of 465 tonne globally, which in value terms translated to around $14 billion.
Now the big question is the precious metals current rally, which has fuelled so much enthusiasm among investors for real. According to Naveen Mathur, head of Angel Commodities, ?Gold in the international markets can sustain at a level of $1,055 per ounce because of factors like looming fear of inflation and weakness in dollar.? He feels by the end of the year international gold prices might rise to $1,060 to $1,078 before correcting a bit. Vibhu Ratandhara, assistant vice-president, Bonanza Commodity, also feels that though in the short-term gold prices may correct, it won?t be a downward trend and prices will again climb to around $1,150 by the end of this calendar year. The latest trigger for gold was an unconfirmed report that major Gulf nations ? which produce almost 30% of the world oil ? are planning to price oil against a currency other than the dollar. This, along with other factors like inflation spiraling out of control by the year-end, propelled gold above the $1,050 mark in days.In India, the gold rally was not that sharp as Re gained almost 3% against the dollar, which incidentally is trailing at its lowest level in 2009 and has lost almost 6.6% against a basket of six major currencies this year as the US kept interest rates low and government debt surged to keep the economy afloat.
A recent survey by Bloomberg of 19 traders, investors and analysts showed that gold would rise as soon as next week to another record because of continued weakness in dollar and inflationary concerns. In short, the terrific gold story is not over yet.