Systematic Investing in Gold – a few charts

Published: December 11, 2016 at 4:18 pm

Last Updated on September 25, 2019

Here are few charts based on a systematic investment in gold. I did this primarily to satisfy my curiosity after a similar study with S & P 500 and Nifty: Buying “low” vs Buying “systematically: Surprise, Surprise!

Regular readers may be well aware of my stand on gold: that it is riskier than Stocks! I had also suggested understanding risks is crucial before buying bonds: Sovereign gold bonds: What you need to know before buying

In a nutshell, it is as rewarding as fixed income “over the long term” and as risky as equity over any term. And a huge component of this risk arises from current fluctuations: Gold Price Movement: USD vs INR.

Similar to the previous study, we will consider three types of SIPs:

1 Normal SIPs where one troy ounce (31.1 gm) is purchased each month on the first business day of each month.

2 Buy low-SIPs, purchases made only when the gold price is lower than its 10-month moving average. If there is a delay for a few months in investing, the entire backlog is invested during the month in which the price fell below the 10-month average.

3 Buy high-SIPs purchases made only when the gold price is higher than its 10-month moving average.

Eight Year Periods

8y-sip-gold

Notice the huge spread in normal SIP returns, plotted against the price (per troy ounce =31.1 gm) movement. Many naively believe by looking at the price movement that “gold will always go up” as though it is a fixed income instrument!

For each of those blue dots, here is how the corpus obtained via the three SIPs modes compared.

8y-sip-gold-corpus

Unfortunately, this is not quite perceptive. Out of the 351 8-year periods considered, the normal SIP resulted in a higher corpus 74% times more than the low-SIP and the high-SIP produced a better corpus 62% times more than the low-SIP!!

Fifteen year periods

15y-sip-gold

The normal SIP did better than low-SIP 74% of the 266 15-year periods considered. Similarly,  the high-SIP produced a higher corpus, 61% of the periods considered than the low-SIP.

Twenty year periods

20y-sip-gold

In this case, 207 20-year periods were considered and 84% of those periods, the normal SIP delivered a better corpus than the low-SIP. Similarly, the high-SIP did better than low-SIP 64% of the periods.

I cannot but be amused at these percentages! As mentioned before, I did this out of curiosity to check if trend following helps a gold SIP. Here again the results as similar to the previous study: Buying low vs Buying Systematically: Surprise, Surprise!

If you are considering a systematic exposure to gold, I strongly suggest that you differentiate between when to invest in gold and when to buy it and recognise how volatile gold is before investing in its price movement.

Consider if gold should be part of your long-term investment portfolio?

If you aim is to plan for your child’s wedding, do consult this: Smart ways to accumulate gold for a marriage.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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