Gold vs Nifty Investment Analysis

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 since 2007.

Gold vs Nifty Return Chart

We will use Nifty 50 level as a proxy for stock returns.

As you can notice in the chart, gold had been blazing the trail alone, leaving equities way behind from 2008 to 2013.

This trend changed from 2014 and equity returns beat gold returns handsomely for next few years.

But things changed again around 2019. The COVID crisis took the sheen off stock investments.

So what was fueling gold out performance prior to 2013 and during Covid crisis?

Gold and Equity Relationship

As gold is an inflation hedge, its value appreciates in high inflation scenario and economic downturn.

Thus, during the 2008-2013 crisis and inflationary period, gold rose while stocks declined.

Post-2013, as the economy recovered, this trend reversed.

The 2012-2013 divergence, with gold rising and Nifty stagnant or falling, shifted in 2015, with gold down and Nifty up.

Having understood the relationship, it's right time to quantify the returns.

A quantitative look at the returns

Let's have a look at the historical returns of the two asset classes. Here is a bar chart depicting yearly returns of Gold and Nifty since 2006.

If you look carefully, both have clear, non overlapping periods of strong and weak performance. This is confusing as it doesn't clarify which is the better investment.

However, by answering the question - are we in crisis? - we can reach a more concrete conclusion.

Gold does seem to be a better option in the time of crisis or economic distress (2007 melt down or Covid).

Gold and Nifty CAGR

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.

Gold is beating stocks?

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.

Conclusion

Again, you can not pick a clear winner by looking at multi period CAGR. 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.