Gold vs NIFTY - Analysis
Updated: May 9, 2022
Analysis done By SFF Member R V Chandrasekar
It is often believed that Gold, being an idle asset performs poorly as compared to active investments like Stocks and Mutual Funds. While this may be true for specific stocks or specific mutual funds, the correct method of comparing these two asset classes is to take an index like NIFTY 50 as the basis of comparison with Gold Prices.
SFF Member R V Chandrasekar has a lot of experience in Technical Analysis of market performance, and he is himself an active investor in the financial markets. He kindly agreed to do this analysis for us.
Chart 1 : Raw data for 15 years scaled to growth
Chart 2 : Raw data adjusted to growth and normalised to check correlation
Chart 3: Same as Chart 2, with Small Oscillations Removed
Over the long term (10-15-20 years), Gold and NIFTY perform equally. They had a CAGR of 10.4% and 10.6% respectively. Average growth for both was about 30%.
In lay man terms, an equal amount invested in Gold as well as NIFTY50 Index fund would appreciate to the same level over the long term. For example Rs 10,000 invested in Gold in the year 2000 would have appreciated to Rs 1,20,000 in 2022. (Rs 430 per gram to Rs 5200 per gram). Whereas the same Rs 10,000 invested in NIFTY50 index would have also grown to about Rs 1,10,000 (Index grew from1500 to 16000) during the same period. The same amount invested in PF / PPF would have grown only to Rs 70,000
For the Medium Term (1-3 Years), there is a negative correlation between NIFTY and Gold. If you know how to predict macro trends in the global as well as Indian financial markets, you could use this negative correlation to get better returns by buying and selling Gold. But this is not easy, and any one trying to time the market with respect to Gold, is taking a big risk.
For the Short Term (Months and Weeks, there is a lot of volatility / oscillations and hence we strongly advice against any short term speculation. Both Gold and NIFTY had a similar volatility score of about 3.6
The reason why Gold and NIFTY perform equally over the long term in a market like India, is actually common knowledge. 90% of Gold consumption in India is for Jewellery. Remaining is for Investments. When the economy performs better, people buy more jewellery. When there is a recession, people don't sell gold, but only pledge it and pay interest to borrow. Even when international events push up gold prices, it often finds a new level, instead of coming back to the old level after some time. And that is because people continue to buy jewellery if they can afford it, irrespective of price. This is true for many other markets and the majority of Gold consumption in the world is for Jewellery.
If you are a middle class saver with an income range anywhere between Rs 2.0 Lacs to Rs 20 Lacs and your saving capacity for long-term savings is in the range of Rs 1000 PM to Rs 10000 PM, it is better to invest in a risk free asset such as Gold than investing in Mutual Funds and Stocks.
If you are an investor whose investment capacity is greater than Rs 2 Lac per year, you could invest part of your investment in the stock markets and part of it in Gold.