Has gold lost its investment value or it still does make sense to stay invested in gold? Gold has been volatile with negative bias for some time now. However, does it mean that, gold as an investment can be completely ruled out?
If we read the chart (See At Variance), we understand the returns on gold or gold price movement y-o-y has shown inverse relation to the index returns. Which means whenever equity markets were down gold has delivered better returns or vice versa. This can be attributed to the fact that investors tend to invest more in equity when the sentiments are positive and in converse when the equity markets are going negative investors find comfort in gold as safe haven.
If we see in the chart there are far too many situations where the inverse relation holds good. The Nifty index movement here is compared to the international gold price movement (because of availability of data) which closely resembles the India gold prices. There might be a slight variation owing to the fluctuations in the currency, however the overall trend remains similar which can be seen in the chart (See Dollar Dynamics)
More recently if we compare the India gold returns with Nifty Index in the last five years, we can still see the similar pattern and quite clearly (See Poles Apart).
To put it in perspective, we are not trying to project the performance of gold and also not commenting on whether the gold prices are heading down or up or even what factors might affect the gold price movement.
The idea behind this is to understand how gold prices have moved vis-à-vis equity returns and does this present to us an investment opportunity which might be helpful. It is often spoken that gold acts as a hedge against inflation, true, but can it be also hedged against bear trend in the markets?
Going by this broad trend depicted in the charts, we can think of gold as an investment option which can deliver returns when the equity markets start consolidating as and when it happens, which however might take some time.
Is Gold Investment Good?
For investors who have invested in Gold Funds in the form of SIP can continue with the investment or even increase the tenure of SIP instead of redeeming. For lump-sum investors who have negative returns, can add an SIP to their investments as they can get more units when the prices are coming down.
The way gold prices are moving now, it looks similar to the negative movement in the equity markets few years back (not as bad though) and most investors did the grave mistake of stopping their SIPs or redeeming them. It can now only be looked at in hindsight as a missed opportunity to buy at lower levels.
This in no way is to suggest that the equity rally will not last long or the gold prices will come up zooming soon. However, if the gold prices are low and might go further low because of various factors affecting it, there will certainly be a change in those factors which might trigger positive cues for gold.
Since the majority of the action seems to lie in the equity space, equity of course takes the major chunk of investment but other classes such as gold cannot be ignored. However, nobody would like to have negative returns when we presume that the equity markets are headed towards newer highs and gold seems directionless. But, if somebody is investing in gold in the form of SIP and the gold prices are heading down, isn’t it that one is adding more units, which would help them gain more as and when the trend reverses.
Is Gold Good SIP Option?
If one is already holding a Gold SIP, this would be an ideal time to add more units. In fact one can increase the tenure of the SIP so that it can continue.
If one is not currently having a SIP and believes equity is the best and the only investment option, the answer is partly yes and partly no. Yes, because in the long run across market ups and downs SIP remains the best investment option and is also pocket friendly, but if one assumes that market is only heading northwards, every SIP investment will be hitting at a higher NAV, so lower units.
Gold on the other hand can be a useful investment option with the prices fluctuating and more so in the negative direction. Also, if the trend in the graph is to be considered, whenever equity loses the favor, gold might give better returns and for those investors who held on to their Gold SIP’s through this lull period will tend to gain more.
The importance of Gold as an asset cannot be ruled out in our lives, and there are products which offer physical gold at the end of the term such as Satyug Mera Gold Plan or Reliance My Gold Plan. These can be good options for accumulation of gold more than the investment and can be planned with a goal or target in perspective. As with any other investment, longer time horizon is of high importance even in gold.
It is better to be prepared for both the best and the worst. For best most investments are already invested in the growing asset class of Equity. For the worst, Gold might be one of the investment options if it carries on with the trend depicted in the charts.