In the world of savings and investment, gold is considered a dead asset and not worth the time and effort devoted to the more popular equities (or shares), fixed income or bonds, real estate and even works of art. It’s time investors and savers start looking at gold with a new lens as it is now outperforming most of the competing asset classes.
The spot price of gold is up 10.2 percent in dollar terms since January this year. It’s even better for the buyers of gold in India. In rupee terms, gold prices are up nearly 18 percent since the beginning of the year. What's remarkable is that this performance is on the back of an equally strong performance by the yellow metal in the 2019 calendar year.
In comparison, the benchmark BSE Sensex is down nearly 16 per cent year to date while the big daddy of global equities New York Stock Exchange Dow Jones is down 8 .3 percent during the current calendar year so far.
Also Read: How to invest in gold for maximum returns
Prices up 7 times in 15 years
And this is no fluke. After its recent success, gold investors have beaten equity investors in the last fifteen years including investors in the United States.
Gold prices in India are up nearly seven times cumulatively since January 2005 against 5.3 times jump in BSE Sensex during the period. In the US, Gold prices are up 4 times against the 2.5 times jump in Dow Jones during the period according to World Gold Council data.
Historically gold was classified as a dead asset since it didn’t provide a yield such as equity dividend or interest on bonds. This was true in the past and gold was at best a store of value where returns came through price appreciation.
The central bank action after the 2008 Lehman Crisis has, however, changed this distinction between gold and other assets on its head. The benchmark interest rates are on their way down globally and they have already hit zero in many developed markets and even negative in countries such as Switzerland, Sweden, Belgium, France, Denmark and Japan. In most of Western Europe, the United Kingdom, United States and Canada interest rates are now just a few basis points above zero.
In other words, if an investor now buys 10-year tenure government bonds in Japan or Switzerland, they cannot expect to earn interest or yield on them, instead they may have to pay a fee to the banks for safe keeping of their money. How is it any different from gold and storing it at home or in a bank vault by paying a fee?
Why hoard gold
Most analysts now expect the interest rate in the United States to hit zero or even negative by the end of the year. The US Federal Reserve fund rate is currently at 0.25 per cent while yield on 10-year US government bonds is 0.72 percent and is expected to hit zero; this will be a game changer for gold as US government bonds are the default safe haven for investors globally and compete directly with gold.
For many, gold is now as good as government bonds which are currently giving zero yield to their holders.
Interest rates are still in the positive territory in India but they are trending down and the Reserve Bank of India has given enough hints that it won’t mind a further cut in interest rate to stimulate demand and lower the government's cost of borrowing.
Many companies still pay dividends and thus investments in their stocks provide a yield or income to the investors. However, as stocks price go higher, yields decline. For example, the BSE Sensex currently provides a yield of just one per cent. And even this is likely to decline sharply in FY21 and the next year as companies’ earnings will take a hit due to COVID-19 pandemic. This means little or no dividend yield for equity investors for at least next two years.
On top of this, the global economy continues to struggle with the economic uncertainty unleashed by pandemic. The global disease count continues to grow at an accelerated pace and an increasing number of countries are now becoming global hotspots. This means more economic disruptions leading to pressure on public finances and corporate earnings in almost all major economies.
So in the foreseeable future, all roads will lead to gold for long-term investors.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).