Systematic Investing in Gold – a few charts

Published: December 11, 2016 at 4:18 pm

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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.

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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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4 Comments

  1. There is a fundamental flaw in all of these Buying low vs SIP studies. With SIPs, you are spending way more time in the markets than when you are waiting for the 10-month average to hit its low. Even though your investment amount in the same, time in the market makes all the difference. This is like opening a RD at the beginning of the year at a low rate Vs opening a FD 9 months later at a 2% higher rate. The RD will still give more returns at the end of the year because of the extra time you remained invested.

    However a normal person would not let his money lie idle for several months while he waits to invest a lumpsum in Equity. He would invest it somewhere else that fetches him atleast 7-8% ROI. Unless and until we consider this aspect, SIP will always win against any other strategy.

    Ask any saavy investor and he will agree that you will always come out ahead if you buy during the dips instead of automating your investments via SIP. The key is to not let your money sit idle. It also isn’t a lot of work as some would think. With the Internet at our fingertips, it only takes a couple of minutes everyday.

    1. I am reworking the calculation with a return assumption, but one must also account for exit loads, tax and there is a fundamental flaw in assuming one will get 7-8% over 15Y and then there is the fact the actual interest earned per month is far lower. Yes, it will increase the total amount invested by a small quantum, whether that is enough to “win” is something that I am happy to check and report.

  2. If we consider only Ultra Short Term Debt funds or Liquid Funds, exit load becomes a non-issue. There is no point in investing in Long Term Debt funds if you are just waiting for those dips in Equity market.

    While 7-8% return may not materialize over the next 15 years given the downtrend in Interest rates, I believe average Equity returns will also go down in a similar manner. It’s unrealistic to assume average Equity return would go up or remain in the 12% ballpark while debt returns would go down significantly.

    I am eagerly looking forward to the revised calculations after your rework. I do believe it will make a difference. Even 1% extra over 30 years makes a huge difference.

  3. It is not 1% over 30y!! It is over a few months. The results obtained so far with 8% debt does not change the conclusions significantly

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