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Gold vs Nifty: 10 year return compared – Will the gold price in India increase?

Sunil Dhawan
Gold price in India, gold returns in India, gold returns in last 10 years, Gold price will increase or decrease in india, gold price will increase in 2020

Falling inflation, crashing equity markets and impending recessionary fears would have been considered the right ingredients for the gold price to go up. Gold, after all, has been traditionally seen as a safe haven for keeping one’s money. However, the gold price is not seeing the spike as was expected from the yellow-metal in times of financial crisis.

Since the start of the calendar year 2020, the gold price in India has moved from a low of Rs 38977 to a high of Rs 44315 (March 6), while currently, the 10gram gold price is around 40,000. Over the last 3 months amidst the looming economic crisis, the gold price has moved by about 2.5 per cent!

The long term returns in the gold price have, however, been impressive especially against its competitive asset class of equity. After the recent equity market meltdown, the long term returns in gold is looking better than equity.

Over the last ten years, the Nifty 50 has generated a compounded annualized growth rate (CAGR) of about 6.01 per cent ( As on March 16, 2020), an absolute return of about 79 per cent, while the BSE Sensex has generated a compounded annualized growth rate (CAGR) of about 6.22 per cent ( As on March 15, 2020), an absolute return of about 82 per cent.

The gold returns in the last 10 years, on the other hand, has generated a CAGR of about 9.4 per cent or an absolute return of nearly 145 per cent!

Recessionary fears could result in rising gold prices and investors can take exposure in their portfolio for the sake of diversification.

Recession and gold price

Recessionary fears that economic activity will take a hit is considered to be a factor leading to rising gold prices. The salutation was last witnessed in 2008 owing to the housing crisis while this time in 2020, the spread of Coronavirus is considered to be the reason for the looming danger from recession. "Gold is a safe haven during such crisis periods and recovery could be seen in the near term," says Abhishek Bansal, Chairman and Managing Director, Abans Group.

Fed and gold prices

Traditionally, it’s considered that investors shun gold during periods of the higher interest rate. This is because better returns can be had from high-yielding bonds, deposits etc. Therefore, the reverse could be true when the interest rate falls.

The US Fed has recently cut the interest rate to near zero and this will have a direct impact on the gold price. "Gold prices are sensitive to the Fed policy stances. The US Federal Reserve took a bold step on March 15 by lowering interest rates to near zero. This rate cut comes less than two weeks after the Fed cut interest rates by 50 basis points. The Fed is making efforts to minimize the economic impact of the coronavirus and also announced to buy $700 billion in Treasury and Mortgage Bonds," informs Bansal.

Will gold price move up

If you are thinking about whether the gold price will increase or decrease in India, here’s what can be expected. "Lower interest rates will keep the dollar and bond yields under pressure and reduce the financing cost of holding non-yielding bullion. India derives its gold prices from Comex (Commodity Exchange) and interest rate changes will have a direct impact on it," says Bansal.

The equity market fortunes may take a reversal as well unless economic damage is severe over the long term. "We expect a bounce-back in global equities as the coronavirus pandemic steadily reduces its effect on the economies, and things start turning normal. Gold prices have corrected nearly 12 per cent from the recent highs and are looking attractive at these levels," adds Bansal.

There is no assurance whether the gold price will increase in 2020, but a small exposure can be taken. If you are looking to invest in gold, here’s a piece of advice from Bansal. "Gold provides safety against uncertainty and is also the best hedge against inflation. It is advisable to invest at least 10 per cent of the overall portfolio in gold."