Gold v/s Equity

Today is ‘Akshay Tritiya’ , an auspicious day in Indian calender which is considered to be the day for investing in gold and carry our other important activities of long term nature.  When Indian economy was mostly agricultural , the proceeds from sale of food grains harvested in previous month left farmers with some cash for investment and it therefore was Okay to convert it into gold like asset for preservation of value . Since there were no other venues available , this was the simplest thing to do.

Now , India is no more an economy that may be called to be totally agriculture based as the value of its agricultural produce would only be between Rs 10 to 12 lac crs ( about 225 billion dollars) i e about a fifth of total GDP. Also , there are now many other options for investment and this exercise goes on almost all round the year, however, this time still remains a time when there is more to invest than later in the year.

Should one be looking gold as a good choice this year can be judged by looking at the following chart :

Date                   Gold Prices (Rs/10gm)        ($/ounce)      Nifty

20/04/07           9370                                       692                   4084

07/05/08          11655                                       869                   5112

27/04/09          14830                                      907                   3481

15/05/10           18215                                     1233                   5278

06/05/11           21685                                     1496                   5750

23/04/12           28635                                    1643                    5200

(Re/dollar parity has changed from 41.77 in 2007 to 52.53 now)

The following chart will give you an idea about the extent to which gold has appreciated in terms of Indian currency i e 3.05 times since 2007 while the Nifty shows an appreciation of just 1.27 times . It may also to be noted that Nifty represents an asset that is productive  i e your investment generates some cash every years. The Nifty companies have distributed dividends in cash over last five years and have also retained profits worth about Rs1250 per unit of Nifty i e your investment in Nifty will be at an equivalent value prevailing in 2007.

The FIIs/NRIs/foreigners would be getting it at even lower value than in 2007 because the dollar itself is now up by 25%. This also restricts the possibility of FIIs deserting market at this stage .  The markets have been showing signs of some nervousness due to first round of election in France showing leftist leaning. The Europe remains an area of concern and Indian reform process has slowed or halted. But these are temporary hick ups , the overall impact should not be too much. If however the results by India Inc show stability than the future profitability will only improve as the lower interest rates will ensure it.

Any increased supply of gold in market will not be easily absorbed at current prices . If some big investors are looking at shifting from gold to other assets than there would be slide in gold prices. I think there would be some attempt at converting gold into other asset class. I am also noticing a big noise being made in media about popularizing gold as a solid bet. The ETFs are the vehicle to conveniently in invest in gold. The exchanges are offering to not charge transaction fee for gold trading.  This seems to a dangerous point for an ordinary investor to rush to buy gold.



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