Gold or Stocks, which of the two offers a better investment opportunity? Should gold be part of your long-term investment portfolio or should it be only stocks? These are some of the most frequently debated questions among investor community. Are you also a part of the Gold vs. Stock dilemma crowd? If yes, then read along to find out a data backed answer to above questions.

Let's start by having a look at the price performance of gold and equity investment over the last few years. We will use Nifty 50 level as a proxy for stock returns. Here is a chart depicting the gold and nifty levels since 2007:

As you can notice in the chart above, gold had been blazing the trail alone, leaving equities way behind from 2008 to 2013. However, this trend changed from 2014 and equity returns beat gold returns handsomely for next few years. But things changed again round 2019 and Covid crisis took of the sheen of stock investment.

So what was fueling gold out performance prior to 2013 and during Covid crisis? As gold is an inflation hedge, its value appreciates in high inflation scenario and economic downturn. If inflation of any country increases, investors buy gold to balance their portfolio and gold price moves up. So, during inflationary period i.e. from 2008 till 2013 the gold prices were rising and the stock prices were falling. 

As economic scenario started to improve post 2013, the trend reversed. The same is evident in the Gold vs Nifty chart above. There was a huge divergence between gold prices and nifty in 2012-2013 wherein gold was in strong uptrend while nifty was either flat or in downtrend (An ideal time to sell gold and buy stocks). We witnessed the same divergence in nifty and gold prices in 2015 (gold prices continuously going down and nifty moving up). 

After having a look at the price chart, let's have a quantitative look at the returns of the two asset classes. Here is a bar chart depicting yearly returns of Gold and Nifty since 2006:

It's interesting to look at the historical returns of gold and nifty. There are non overlapping periods of huge out performance and under performance for both gold and stocks. This behavior is kind of confusing on stand alone basis as we can't tell which of the two is a better investment option. However, if we add an extra variable - are we in crisis? - we can reach a more concrete conclusion. Gold does seem to be a great investment avenue in the time of crisis and economic distress (be it 2007 economic melt down or Covid). Needless to say, you should ditch gold and choose stocks in time of economic prosperity. 

But what if you are a long term investor with investment horizon of 10 to 20 years who is unaffected by volatility in short term. If you are a true buy and hold guy, which one should you pick - Gold or Nifty? Simplest way to find out is by looking at Gold and Nifty returns CAGR. So here is the Nifty and Gold CAGR since 2006:

Was it a shocker? After reading and hearing a lot of blubber like gold is this, gold is that and stocks are this and stocks are that, this must be a shocker. However before jumping to any conclusion, let me play the devils advocate. You can blame me for cherry picking the period (from 2006) to force a particular outcome. Let's remove the cherry picking part and have a look at CAGR for last 5, 10 and 15 years for Gold and Nifty returns:

Again, you can not pick a clear winner here too. All depends on what period you chose for investments and the outcome will vary accordingly. Having said that, the data here too supports our previous conclusion. If the chosen period went through a crisis or rough economic patch, gold won and vice versa.

So, in conclusion asset allocation needs to be very tactical over here. A lot will depend on your time frame and your ability to predict crisis situation. As smart investors, we should brace ourselves for slowly moving out from overpriced equity and entering into under priced gold and vice versa, when ever there is appreciable divergence between gold and nifty levels. While making an investment view in Gold, one should also cross verify Nifty PE. Nifty PE above 25 is highly unsustainable for equity asset class. This is where the economy gets overheated as capital is cheap. When capital is cheap, companies over borrow. And too much debt is sure shot harbinger of crisis situation. This has happened n number of times in the past and will repeat in future. Look for these signs as this is the time to allocate to gold before others. Otherwise it's better to stick to equity. l will leave you here with your thoughts.

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