Gold, Is It Still the Safest and Risk-Free Investment? (With Reference to Indian Context)

"The desire for gold is the most universal and deeply rooted commercial instinct of the human race." - Gerald M. Loeb.

Besides commercial value, traditionally we (Indians) like to buy and hold the investments in Gold. In this post, let us try to understand the historical investment returns from gold and is it the safest or risk free investment among all the financial assets we have?

Gold prices and returns in rupee terms in the last 30 years:

The average returns from 1985 to 2001 are roughly 6% on a compounding basis. If we calculate the inflation adjusted returns then the real rate of return would be far less or at least equal to inflation. From 1997 to 2001 the prices were almost stagnant.

The average returns from 2001 to 2008 is roughly is roughly 10% (CAGR). In 2001, the September 11 attacks caused global stock markets to drop sharply. The attacks themselves caused approximately $40 billion in insurance losses, making it one of the largest insured events ever.

In 2008, we have seen bear phase in financial markets due to bankruptcy of major Financial Banks in USA and Europe. The average returns from 2008 to till date is roughly 18%. Amazing returns indeed, the demand for gold has increased during this duration because investors or economies preferred to stock gold over other financial products.

So, can we safely assume that Gold prices will rise forever or continuously? May be or may not be. Gold prices increased when people lost trust in paper currency, this has been proved in the past. At the same time, when dust settles down, investors prefer other Financial products over Gold.

"As fewer and fewer people have confidence in paper (currency) as a store of value, the price of gold will continue to rise." - Jerome F. Smith

In 2013-2014 the performance of Gold is not great. From the Rs.31, 000 levels per 10gms, prices fell to Rs25, 000. The price fall was still restricted if we compare to international Gold prices. Domestic gold prices are still at elevated levels mainly due to the rupee depreciation and the import duty.

Volatility in price movement:

Two decades back Gold prices used to rise steadily and the volatility in price movement used to be minimal. Now, the price movement is influenced by many factors like but not limited to Foreign Exchange rates, Demand for Dollars, Crude oil prices, Country specific economic factors, Equity markets performance etc. Gold is now both a commodity and currency accepted across nations, financial institutions, stockists, investors etc.

To sum it up, Gold may not be the safest bet anymore especially if you are expecting quick short-term gains. But if your time horizon is more than 5 years or so then returns may beat inflation. In fact, the periods of extreme volatility could be used to bring the average cost down.In my view, Gold should be part of your portfolio, but not more than 10%. It is advisable to buy gold in a staggered manner rather than investing lump-sum. Gold ETFs are the best mode of investment.

Now that there is a fear of brewing crisis in Middle East. Are we going to witness another bear phase? (Let's hope not).

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