Last Updated on August 22, 2022 at 11:16 pm
On Jan 2nd 1979, Gold per troy ounce (about 31.1 grams) was Rs. 1792.85. On 24th July 2020, 41 years later (41.6 years technically), the price was Rs. 142343.67. That is a CAGR or an annualized return of 11.1%. There is however a catch though.
Announcement: A new seminar is available: How to construct a long-term investment portfolio – a guide for beginners. You can sign up via this form. This is meant for absolute newbies to start investing in the right way, asking the right questions and not make the mistake of choosing products in the very first step and repent later!
During the above-mentioned period, Gold in terms of USD moved from 226.8 to 1,902.1. An annualised return of 5.25%. So catch (no 1) is, most of the returns for Gold in INR over the last four decades has been from exchange rate appreciation.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Over the last four decades, India has changed quite a bit. In the 80s, India was a closed economy heading towards bankruptcy. In the 90s it was arm-twisted into opening the economy. The Rupee lost tremendous value, the government was almost bankrupt (why do you think EPF, PPF rates were 12%-ish then? Credit risk!) and India was emerging as a major tech player.
We then saw the stock market soar in the 2000s only to be interrupted by the “global” financial crisis. While inflation in the US dropped sharply in the 1980s has been stable since then, inflation in India has been uncomfortably high most of the time. As we shall see below it is only from the 2000s, Gold-INR has been moving in step with Gold-USD. The point is, much of that 11% return is from our economic reorientation with a Rupee under the mercy of market forces.
One common question I see is, “gold price has always been increasing. Is it not a good investment?” The reason is, people see selected data points (as above) and assume gold will always provide “good returns”. This is how the Gold-INR has moved over the last 41 years.
That “looks” spectacular, but not so fast. Let us look at it in log scale so that up and down movements are normalised. The regions in “red” show periods in which the prices have fallen down for extended periods -years!
The resemblance with Sensex is uncanny: Are you ready to climb the Sensex Staircase?! So the catch no 2 is with regard to how the annualized return is calculated. It just used the start and end prices ignoring the movement in the middle.
India had a “golden decade” bet 1979 to 1989 for those who wished to accumulate physical gold. We also another 5-6 years where the price was “underwater” (less than the peak). So this 11% over 41 years is simply a case of cherry-picked hindsight bias useful only for WhatsApp forwards.
To understand how the exchange rate is key reason for gold-INR returns for the first two decades of the last 41 years, let us look at the normalised movement of gold-INR, gold-USD and INR-USD
From 1979 to mid-2007 gold-USD was “underwater” – that is an astonishing 25-26 years!! Gold-INR moved up for the most part of this period only because the rupee suddenly became market-linked and progressively grew weaker against the dollar.
Let us look at the same cherry-picked dates as above. If we normalise gold-INR, gold-USD and INR-USD to a vale of “one” on 2nd Jan 1979, on 24th July 2020, gold-INR grew to 79.4! Gold-USD to 8.4 and most amusingly INR-USD to 9.4. No better way to identify the key driver as the exchange rate.
From 2000 onwards, gold-INR has been in more or less in step with gold-USD. This means the “alpha” from the exchange rate has reduced significantly and has become steady (a sign that our economy is in better shape).
We pointed out catch no 2 was the extended periods of gold price trading below a maximum. This results in huge investment risk for those who invest in gold for returns (accumulation for consumption is not an investment).
The disparity in gold-INR and gold-USD movement can be seen in five-year rolling returns (white window).
In case you are wondering what return you would get by holding a sovereign gold bond 8 years, the answer is, “we do not know”. It is pot luck. The returns can fluctuate wildly. Gold is just as risky as stock if not riskier!
The 15-year rolling returns tell you how the exchange rate “benefit” has significantly reduced in the last decade.
15 year rolling returns of Gold-INR and Gold-USD from Jan 2nd 1979 to July 24th 2020Summary: Investors should not look at random price data and make conclusions about risk and reward. They should look at past performance want to enter an asset class. A sound investment strategy is essential. You can check out our past articles on gold to do this:
- Sovereign Gold Bond Scheme 2020-21: When to use and when not to!
- Will including gold in my portfolio help?
- Is this a good time to buy gold? A tactical buying strategy for gold
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)