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Is gold a better investment than stocks?

    Mr. Rahul Singh | Tuesday, February 17,2009, 07:48 AM
 

Which is a better investment- a share of Infosys or a gram of gold? I will discuss this interesting comparison between these two very different investments class. Let us choose the golden company of India, Infosys Technologies. Lot of people became millionaire due to its stock. Infosys is well admired by millions of Indians for its growth, integrity and stability. Similarly, millions of Indian buys gold for all sorts of purposes because they believe in gold. At the broader level, a comparison between these looks similar. Let’s take a micro look at their performance in terms of price. Below is a graph which plots the stock price of Infosys and price of gold per gm for the year 2008. We can see that at the beginning of 2008 both the prices were more or less same; however, 12 months later, we can see that Infosys average trading price for December 2008 was Rs. 1,240 while the average gold price was Rs. 1,404. Though both lost money over the twelve months, both losses in Infosys stock was much higher. Infosys lost about 18%, BSE Sensex shed over 60% of its value while gold lost only 8%. Shall we assume that investing in gold was/is a better than investing in Infosys stock?

Fig 1: Infosys stock is in pink color while Gold is represented by blue line.
The vertical axis (Y-axis) represents average prices while the horizontal or X-axis represents month of year 2008. Also analyze one year and 5 year return of Infosys and Sensex.

Critics may argue that last year was a historic period due to unprecedented financial crisis which crippled entire world. It would make sense to compare these two assets before the period of Jan 2008. Let’s take a look at the graph of these two prices between 2004 and 2007 and find out which was better or more stable compared to the other. I have taken Infosys ADR prices in the unavailability of historical share price data in Indian rupees. ADR is American Depository Scheme and represents the ownership in the shares of a foreign company trading on US financial markets. Infosys is listed on NASDAQ. ADR values closely follow Indian stock prices.

Fig 2: Infosys stock is in pink color while Gold is represented by Yellow line.
The left vertical axis represents average stock price of Infosys while the right vertical axis represents average gold price per ounce for the same year. All values are in US $.

To evaluate critics’ argument, I have tried comparing the performance of gold w.r.t. Infosys stock over the last eight years between 2000 and 2007. We can see two extremely remarkable things here:
1. The variations (volatility) in the stock price of Infosys is much higher than that of gold
2. During the dot com bust when all the major stocks crumbled and US economy almost went into recession, gold not only hold on to its value but also saw major price appreciation.

The average price of gold in 2000 was $302.62 per ounce while the average Infosys ADR was around $37.21. By the end of 2007 these values were $696.43 and $48.6. Thus gold gave you an absolute return of 130% while Infosys ADR gave a return of just 31% after 8 years.

Don’t you think investing in gold was a much wiser and better investment than buying Infosys stocks? I definitely believe so. If you still do not believe so, ask a woman!

Gold ETFs

I believe it is a good cocktail or gold and trading. Those who like the glamour or excitement of trading but want to invest in Gold may opt for Gold ETFs. There are quite a few ETFs in the market namely- Reliance, Kotak, UTI Gold ETF to name a few.

Advantages

  • There is NO risk of loosing it due to theft or other natural causes and headache of storage; all these facilities are provided by the fund houses.
  • The annual expenses of the fund such as storage, insurance, and management fees are charged though initial commission which is less compared to what one has to pay banks for storing them.
  • Another benefit of the gold ETF is that it is not liable to a securities transaction tax or even a wealth tax owing to its dematerialized form.

Disadvantages

One of the shortcomings of the ETFs launched so far is that redemption does not translate into physical delivery of the gold.

How to Trade in ETFs

You need to have a DMAT account with any of the leading brokerage firms or banks such as ICICI, HDFC, IndiaBulls and ShareKhan. ETFs are just like stocks i.e. they are traded on stock exchange. You can buy units of ETFs by placing an online request through your DMAT account for the same.

Selecting Gold Funds

When selecting a fund, an investor should be aware of significant differences between funds :
1. Investment style................Conservative or Risky
2. Load Structure................. Entry load and/or Exit load
3. Fund Manager................. Experience, India Rank
4. Fund sizes.........................Varies from Rs. 7.4 Crores to Rs. 1671.02 Crore
5. Net Asset Value (NAV)...Varies from Rs. 8.24 to Rs. 1,433.23

A list of Gold ETFs currently in the market :

Fund Name

Fund Size(Rs. Crore)

Entry Load

Exit Load

NAV(Rs.)

Kotak Gold ETF

50.44

1.5%

0.0%

1,433.23

UTI Gold ETF

186.18

0.0%

0.0%

1,430.87

Reliance Gold ETF

204.05

0.0%

0.0%

1393.46

Mr. Rahul Singh

Mr. Rahul Singh is a B.Tech (Electronics) fom IIT Roorkee. He did his MBA from Kelly School of Business, Indiana University in 2008. He worked as a developer and a project lead at Support Soft India (Aug 2004-June 2008), a small software firm, where he was instrumental in establishing a critical product vertical within the firm. He also spent two years at Infosys between 2002 and 2004. He also worked as a Business Strategy intern (May 2007-Aug 2007) at Wetpaint.com Inc. in Seattle and gained significant experience in managing strategy and operations at a start-up.

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