Gold “zero” returns in last one year, shares gain 50%; What to buy now?

Investment

oi-Sunil

By Sunil Fernandes

Published: Friday, September 5, 2014, 8:44 [IST]

Gold has given "zero" per cent returns in the last one year. In fact, the returns are negative. In Mumbai gold rates for 22K on Sept 4, 2013 was at Rs 2845. It is currently trading at Rs 2600.

Check gold rates in your city here

Clearly, there has been a sharp fall in gold rates and if you had invested a year back, you would have regretted.

Look at the Sensex...

The Sensex in the meantime has rallied 50 per cent. From around 18,000 in Sept 2013, the Sensex is up 27,000 points, a sharp gain of exactly 50 per cent. When we say shares have gained 50 per cent, what we mean is the Sensex and the Nifty which are up near those levels. Select stocks have gone up even further, while many stocks have languished.

This leaves us with the question: What to buy now?

If you analyze every possible theory, including that of Warren Buffet, who says "be fearful when everybody is greedy and be greedy when everybody is fearful", then you want to sell equities. Even simple logic says that you need to buy cheaper and sell higher to make money.

Everything has gone right for the Sensex this year. There is a stable government at the centre, economic growth is reviving, Europe and US have recovered and there's a lot of easy money from easing programmes, unleashed by the Bank of Japan, US Federal Reserve and the ECB. This money has found its way into Indian stocks, which is why there is everyday a net buy figure in the cash segment of the equity markets in India from foreign funds and shares are touching new highs everyday.

Let's assume that the good things keep continuing. At best the Sensex can rally to 30,000 points by next Sept. This would mean 10% returns, which you would get anyway in the bank. But, to get the 10% return from stocks, there is a big risk that you are taking and there is no guarantee of the return and protection of your capital, like a bank deposit.

The point to note here is markets are run-up too fast and just too much. To buy at this level, the reward is not as great as the risk. Had you to buy at a much lower level, the reward would have been far greater.

Geo-political tensions (Iraq, Ukraine) along with hike in interest rates in the US, would likely stall this rally and you may end-up with losses.

What about gold?

Gold has gone nowhere in the last one year and unless there are serious geopolitical tensions, gold is unlikely to rally. Either the world economic growth must stall or tensions across the globe must escalate for gold to rally. Apart from that the only other way Indians will benefit from buying gold is from a sharp depreciation in the rupee.

At best gold might continue to move in a narrow range. To get 10 or 15 per cent returns from gold, geo-political tensions must play out. After all, gold is a safe haven asset, which rallies on such outcomes.

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