The Gold Paradox

Last week I shared this note with all clients @ Ashoonya.

'I had my first tryst with investing 25 years back & I thought it would be interesting to check returns on various asset classes or investments during this period.

So here goes the 2001-2026 twenty five year CAGR # (Compounded Annualised Growth Rate) on :

Sensex/Nifty 14%

Midcap Index 16% ##

Smallcap Index 15% ##

Gold 15%

FDs (Average) 7%

Large Cap MFs (Average) 14%

Midcap MFs (Average) 18%

SmallCap MFs (Average) 20% ##

Hybrid MFs (Average) 12%

Debt MFs (Average) 7%

# CAGR in simple words is annual return year on year

## Inception only after 2001

Food for thought.'

On reading this Sangeetha (my co-founder) instinctively responded saying & I quote,

'So if we shut our eyes and invested in gold it would give us returns equal to that of a diversified equity based portfolio.'

The simple answer is Yes.

But there is a caveat there. 5 actually. Because it's gold.

1. Think about it. How many of us even now invest in gold every month or year on year like clockwork. If anything our gold purchases are lumpy. Add to that 25 years back we didn't have the tools in place to buy gold digitally. The logistics or the lack of meant that purchases were even more lumpy. Occasion-based in a country like ours.

2. Purchases. Yes. That's the word I used. Gold isn't really bought as investment. It's bought as jewellery primarily. Investment-grade gold is bullion. But investment is almost always a second order effect. Other than the owner's pride and the neighbour's envy. Sorry Onida.

3. The CAGR on gold looks this healthy especially because of the J-curve we've seen in the last 6 years. Switch to 18 year CAGR over 2001 to 2019 and it falls to 12%, still healthy but underperforms every other asset class.

4. Then comes the illusion of linear returns on a single asset portfolio. If I invest in just gold optically it looks like I'll get a 15% return year-on-year but in reality returns don't move like that. They're volatile. Up & down & flat. Would we be ok with long periods of zero or negative returns in a single investment. Would we have the EQ (emotional intelligence) to hold on. CAGR is a smoothened out return over the long-term. We must recognise that that is where diversification comes in.

5. And finally. How often have you seen an exit from gold for investing reasons. Good returns so let's take some profit off the table. Not such good returns so let's switch into another investment. All these rationales that apply to other asset classes disappear into thin air when it comes to gold. We only sell gold when it rains. Rainy day asset. And now we don't even do that. We simply mortgage it or pass it on in inheritance. In doing this there is definitely wealth creation & store of value but it lacks financialisation which is crucial to reap the benefits of the 15% CAGR.

So while the simple mathematical answer to Sangeetha's observation is an emphatic Yes, the details are a little more nuanced.