The Golden Myths

Posted On Thursday, Nov 20, 2008


2008 has turned out to be a year of "synchronized fall in all asset prices" across the globe. Gold as an asset class has also fallen by 11% in US dollar terms.

The fact that gold prices have come down has led to some misconceptions on the ability of gold to deliver returns. Some of the misconceptions on Gold are :

  • Gold has not performed well in the current year in comparison to other asset classes.
  • Unlike other asset classes like Stocks and Bonds, investment in gold does not provide sufficient returns as no income accrues in the form of dividend or interest.
  • Gold is more volatile vis-à-vis other asset classes and therefore more risky.

To understand these better we analysed data over the past 5 years and ascertained the returns offered by Gold and other asset classes both in the Indian and Global context. In addition we also took into account the risk (volatility) associated in getting these returns, leading us to calculate the risk adjusted returns viz. returns per unit of risk. The table below gives a good comparison on the performance of various asset classes :

AssetAsset ClassYTDYOYCAGR 3 YearsCAGR 5 YearsAnnualised Volatility (Risk)Returns
Per unit of Risk

Gold (USD)Commodities-11%-6%17%13%20.73%0.64
Gold (INR)Commodities11%17%19%15%20.39%0.74
Crude Oil (USD)Commodities-41%-39%0%12%36.31%%0.33
Rogers Commodity IndexCommodities-35%-33%-3%5%20.30%0.25
CRB IndexCommodities-31%-29%-7%-1%17.92%-0.04
Goldman Sachs Commodity IndexCommodities-34%-32%-1%10%25.89%0.38
Dow Jones Industrial AverageEquity-36%-35%-7%-3%18.37%-0.15
I-Sec Sovereign Bond Index`Bonds9%11%8%5%8.66%0.63
MSCI World IndexEquity-45%-45%-10%-2%16.11%-0.12
MSCI Emerging Market IndexEquity-57%-58%-6%5%22.86%0.21
MSCI India IndexEquity-58%-55%2%12%28.88%0.41

Source: Bloomberg

*Data as on 14th November 2008.
YTD data from January 1, 2008.
Annualised volatility is measured using daily standard deviation over the last 5 years
Returns Per unit of risk = (e) / (f) [i.e. Risk Adjusted Returns]

And the conclusion does not surprise us.

Gold has clearly outperformed other asset classes in generating better returns with lower risk. Gold has proved once again that it’s the best safe haven in times of turmoil. It is clear from the above table that investors across asset classes having a portfolio allocation to gold, would have limited their overall portfolio losses.

Investors show vote of Confidence in Gold!!!

Gold Exchange Traded Funds (ETF), a preferred vehicle usually used by global investors to gain exposure to the gold asset class have seen their gold holdings remain robust. Physical Gold held under Gold ETFs globally at the end of October 2008 was 1,020 tonnes just 24 tonnes lower than its peak seen this year.

Is this signaling that the smart and long term money continues to have faith in gold as a safe haven in these turbulent times ?

Above article is authored by Quantum.

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