Is gold a good investment option?

In India, gold is a coveted commodity and wearing gold jewellery in ample measure brings smile on the face of any Indian women. This is because the ownership of gold is considered as a status symbol and a measure of wealth of an Indian family. Gold ornaments are handed down from one generation to another as a family treasure. No wonder, gold is bought on various occasions such as marriage, wedding anniversary, birth of a child as also on ‘auspicious’ days such as DhanTeras and Akshaya Tritiya. Most importantly, gold as an investment offers excellent financial security and easy liquidity to the investor. But, the moot point is, does gold offer good returns to the investors?

The value of gold rises in line with the level of inflation, hence one can say that investment in gold helps protect the value of investment over the long term. Keeping pace with inflation does not lead to wealth creation in real terms, because to create wealth, the rate of return has to be higher than the rate of inflation. Of course, the value of gold will keep rising due to the demand-supply mismatch—demand usually being higher than supply.

The price of gold has kept pace with the rate of inflation is evident from the statistics available relating to the price of gold since 1979. During the 39 years since 1979, the price of gold has risen from Rs 635 per 10 gramme in January 1979 to around Rs 32,000 per 10 gramme in February 2018, which gives CAGR of around 10.5%. The average rate of inflation too has been around 10% annually over the same period. Hence, the price of gold has kept pace with the inflation, but it has not outperformed inflation.

Hence, gold as an investment option is not a very attractive proposition in terms of returns as compared to equities and real estate, which have given much higher rate of returns to the investors over the long term. Of course, this is not to suggest that one should not invest in gold or gold ETFs. One can surely buy physical gold or gold ETFs, but the exposure should preferably not exceed 10-15% of the total portfolio of investments.