Gold & Silver

10-year gold returns close to equities, better than bonds, says WGC report

Suresh P Iyengar Mumbai | Updated on March 24, 2020

Notwithstanding the recent price volatility, gold has delivered an average return of about 8.87 per cent over the last 10 years, comparable to stocks and a tad more than bonds and commodities.

Over the past decade, Indian equities have given a return of 11 per cent while bonds gave 8.81 per cent. However, commodities gave a negative return of (-)2 per cent.

Interestingly, in the years when the inflation was over 6 per cent, gold prices increased 11.5 per cent on an average, said a the World Gold Council (WGC) report titled ‘The relevance of gold as a strategic asset: Indian edition’, published on Tuesday.

Mainstream investment

Gold is increasingly being recognised as a mainstream investment with its global investment demand growing on an average at 14 per cent per year since 2001, and prices have increased almost eight-fold over the same period, said the report.

Somasundaram PR, Managing Director, India, WGC, said in these times of global and domestic market turmoil, gold is more relevant than ever before for Indian investors. Gold possesses the ability to significantly improve the risk-adjusted returns of portfolios across various levels of risk and act as a hedge against inflation, he added.

The report estimates physical gold holdings by investors and central banks at ₹266-lakh crore with an additional ₹68-lakh crore in open interest through derivatives traded on exchanges or the over-the-counter (OTC) markets. Gold trading volumes averaged ₹10.3-lakh crore per day last year, against the OTC spot and derivatives contracts trading of ₹5.5-lakh crore while gold futures traded 4.6 tonne per day across various global exchanges.

Gold trading volumes on the MCX came up to ₹6,100 crore per day. Gold-backed ETFs offered an additional source of liquidity, with the Indian-listed funds trading on an average of ₹180 crore per day, the report said.

The average annual return for gold has been at 10 per cent since 1981, outpacing the Indian consumer price index that averaged over the period at 7.35 per cent.

An analysis of the investment performance over the past two, five and ten years shows that a hypothetical average Indian pension fund would have achieved a higher risk-adjusted returns of 5 per cent, 7.5 per cent or 10 per cent if the portfolio were allocated to gold. The analysis also illustrates that for a hypothetical Indian pension fund average portfolio, the optimal allocation to gold falls between 6 per cent and 17 per cent.

Little change in supply

A key factor for the steady returns is the fact that the supply of gold has changed little over a period, increasing by just about 1.6 per cent per year over the past 20 years. In comparison, the report said, fiat money can be printed in unlimited quantities to support the monetary policy, as exemplified by the quantitative easing measures in the aftermath of the global financial crisis, it said.

Gold has become increasingly relevant in the current environment and is being recognised as a mainstream investment. Institutional investors are embracing alternatives such as gold to traditional stocks and bonds in a pursuit of diversification and higher risk-adjusted returns, it said.

Gold not only works well for investors during periods of turmoil but also delivers positive correlation with stocks and other risk assets in positive markets, it added. The double benefit arises from its dual nature as an investment and an adornment. As such, the long-term price of gold is supported by income growth, said the report.

Published on March 24, 2020

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