GOLD VERSUS EQUITY

The world, still uncertain about economic prospects, now made a little more uncertain by Dubai's bankruptcy, seems to be making a beeline for gold, still considered a safe investment. Of course, as is well known, there is an inverse relationship between the fortunes of the dollar and gold prices and as the dollar has lost almost 8.4% this year against a basket of major currencies, the yellow metal has moved towards its biggest yearly gain since 1979. In India, the world's largest consumer of gold, prices jumped to whopping Rs 18,000 per 10 grams, from around Rs 12,000 in a span of just six months. This has dampened the demand for gold, in physical form. Purchases during the festival and marriage season have been sluggish because of high prices. Interestingly, in October (the peak of the festival period), Indian gold imports dropped by almost 11.5 tonnes to 26 tonnes. And even though gold prices in the Indian market didn't entirely reflect the spike in global rates—the rupee went up by almost 3.9% in the last three months—it was good enough to ward off several new and prospective buyers.

 

However, gold continues to attract investor interest, if not retail interest. Even central banks seem interested. RBI's sudden move to buy 200 tonnes of IMF gold, followed by similar purchases—though in far smaller quantities—by Sri Lanka, Mauritius and Russia were all noteworthy. The continuous rise of gold has led to a boom in investment in instruments like ETFs. As on November 25, investments in SPDR Gold Trust, the biggest exchange traded fund-backed by bullion stood at 1,127 tonnes, almost 4.5% more than the holdings on September 14. Still, the events of the last days further showed the vulnerabilities that a retail investor has to bear with. A rise in dollar index along with the Dubai debt default crisis which triggered fears of another banking meltdown compelled investors to look for the nearest exit route. Spot Gold dropped almost 3.4% from Thursday's close to around $1,151.60 per ounce—in just 24 hours the metal lost almost $40 per ounce. This is precisely the sort of blip that makes us less bullish on gold. Historically, and leave out the last few years, gold has been an underperformer compared to its biggest rival, equities. The World Gold Council data shows that on a five-year basis return on the main 200 stocks listed in the Bombay Stock Exchange has grown at a compound annual growth rate (CAGR) of around 24%, while investment in gold in rupee terms has grown at a CAGR of 19.8%. Something worth pondering over in the mad rush towards gold.