Recently Gold has outperformed the greatest stock market Investor Warren Buffett over 20 year period. The below chart depicts the track record of Gold (in violet ) generating 6.2x return against 5.2x return generated by WB’s Berkshire Hathway (BRK-a in orange)over the same period
Gold as an asset class has been derided by the utilitarian Stock Market Investor for not being a commodity with no utility. However, Ray Dalio of BridgeWater Capital have different view on the matter. But to me both the perspective are western and needs an Independent Indian gaze. So this article shall be looking at Gold as an asset class from Indian Investor perspective.
To an Indian Gold is a storehouse of value which we Indians have seen for past 2000-3000 years. Another point is that Gold has definite ornamental value. So even a core Buffett worshiper Indian might not face hard time rejecting WB’s hypothesis.I find 4 reasons why Gold prices have risen, which are detailed below:
1.Too Much Liquidity
Gold has a long standing friend in the form of US Dollar Money Supply (M2). The friendship (Strong Positive Correlation) is hard to miss in the below chart:
To add fuel to fire , US Federal Reserve have announced in March 2020 that it would print 3 Trillion $ for buying government bonds to fight Covid -19. For an Indian 3 Trillion means our annual GDP.
European Central Bank would spend €750 billion ($820 billion) buying government bonds before the end of 2020.On similar lines Bank of Japan would spend $ 1.0 trillion buying government bonds to fight Covid -19. So there would be strong liquidity flow from central banks trying to save their respective economies from Covid which would further strengthen the Yellow Metal’s journey .For an Indian Gold is an hedge against World’s Central Bank gone wild.
2. Too Much Uncertainty
It is a proven fact that Gold prices move higher as economic conditions deteriorates due to uncertainties .In 2020 , there is no dearth of uncertainties. On one side Covid 19 has broken the economy down and world is gaping at an imminent recession while on the other side China US trade war is not going to stop in near time. Also the coming US presidential election in November means that there would be enough supply of news on US China front from Twitter savvy president.
3.Negative Real Interest rate Regime
Gold acts as Hedge against inflation as its prices move higher as real Interest Rate goes down. The Real Interest rate of major Economies such as Japan , Europe (excluding USA) have been in negative territory since 2016. Recently the US Real Interest rate also turned back negative as shown below:
In India if we calculate Real Interest rate then it is nearing zero:
Real Interest Rate= Nominal Interest Rate (5.7%) –Inflation (5.8%) =-0.1%
(10 year G Sec rate =Nominal Interest rate)
As per Jefferies India Real Interest Rate of India has turned negative last week.
4.Depreciation of Rupee
If we compare 10 year Gold prices in USD vs INR then we see that Gold in INR has outperformed Gold in USD by a wide margin of 50%
Overall return =1.5X in Dollar
Overall return = 2.0 x in INR
The obvious reason is Rupee Depreciation against Dollar by 50% (1 USD was Rs 50 in 2010 against present Rs 75). Since Indian Govt is unable to tame Rupee thanks to our CAD the story continues. Rupee Depreciation against Dollar is a Real Risk and Gold being a Global asset class diversity’s this Risk. This is a purely Indian reason to invest in Gold as hedge against Rupee depreciation.
5. Gold as an portfolio hedge
Economist have been long shouting that Gold should form 10 %to 15% of one’s portfolio as it is strongly negative correlated with Equity. If we pit Gold against Equity, the year wise returns suggest that Gold have beaten Sensex 16 out of 40 years in the past:
(Source: Quantum MF)
There are enough evidences to believe that smart hedge fund managers have started taking positions in Gold as evident from the capital flow of Gold ETF globally as well as locally. The Indian Gold (ETF)Rush is depicted below:
(Source: AMFI; PersonalFN Research)
My view is that every investor should have a meaningful allocation towards Gold in the form of either Gold ETF or Gold Saving Funds. As all the above mentioned 5 reasons still hold true and provides a strong basis for Gold to have a long runway to fly. The key point to remember here is that Gold could be an effective portfolio diversifier in the case of another stock market correction and renewed risk aversion.