Gold as an asset was a star performer till 2012-13. Investors were swearing by it.“There is nothing like Gold in this world. Everything else is farce!” said a gentleman who withdrew large sums of money from stocks, and invested in Gold, in the year 2012.
He drew his conviction on gold due to non-stop rally in Gold prices since 2004 to 2012, when it rose from Rs.4000/- per 10 grams, to Rs.27,000/- per 10 grams. His conviction grew stronger as the stocks were giving losses at that time. The SENSEX had peaked out in 2010 and was trading 25% below the peak in 2012. Gold’s dream run continued till 2013 when it peaked around Rs 33,000 level, only to fall -30% next year. The prices came down to Rs 23000 per 10 grams for a brief period. That kind of volatility in Gold prices was not anticipated by anyone. All noises of “BUY Gold” got hushed, and investors started looking towards stock markets which were warming up before general elections in 2014.
Fast forward to present, Gold still trades at near peak level of Rs. 33,000/-. Its virtually ZERO returns over last 7 years doesn’t warrant a spicy conversation in cocktail parties. To invest in Gold is as boring as watching paint dry. It has been overshadowed by long standing rally in Equities. No investor wants to look at a losing asset.
But wait, isn’t it how one should identify an undervalued investment. If nobody is excited about a particular asset class, chances are that it is available at a deep discount. And that’s the case with GOLD & SILVER at present. They are out of demand and out of focus.
From 2012 till today, lots of water has flown under the bridge. India has grown from USD 1.3 Trillion economy, to now a USD 2.7 Trillion economy. US DJIA Stock market has grown from 13000 to 26500, a whopping 100% jump since then. INR has crashed by -35% (i.e. from a level of 52/- per USD to 70/- per USD). Trade War between China and US is weighing down on global economy. Seven years is a long period.
Due to continuous meteoric rise, the US stock markets valuations are looking stretched. Unlike India, where the growth in Stock Index is happening on account of fresh retail participation, the growth in US is due to companies buying their own stocks. Goldman Sachs recently warned that without company buybacks, demand for US shares would fall dramatically. Repurchases have consistently been the largest source of US equity demand. Since 2010, corporate demand for shares has far exceeded demand from all other investor categories combined. US Corporate DEBT is also rising rapidly. Corporate DEBT as percentage of GDP has risen to pre-Lehman crises phase.
On the other hand, GOLD in USD terms is trading well below its 2013 peak. From a price of USD 1973 per ounce, it is now available at USD 1327 per ounce. If Gold were to climb back to its peak, it will be a 48% appreciation for investors. If that happens, then we are looking at Gold prices of Rs 48000 per 10 grams, at present currency exchange rate!
Not only Gold, the Gold mining stocks are also available at throw away prices. They are trading at their 10 year lowest level. Last 1 month return in DSP World Gold Fund is 10.69%, but -0.93% CAGR for last 10 years. One can imagine the amount of undervaluation in this segment. This fund is not for a faint hearted. But, a disciplined SIP shall be worthwhile.