Gold or Equity?

In the last one week or so, this simple question has been discussed by valued experts on investment on television channels and eminent financial & economic writers in prominent newspapers in lengthy columns, giving 15 years of data on returns on investment in both gold and equity, and comparing the gains. It is said by these knowledgeable people that the rate of return has been 11% from both gold and equity over a span of 15 years. Such conclusions spur the ordinary to invest in equity rather than gold in physical form or jewellery. However, they advise that the Gold ETF (Equity Traded Funds) are better investment option than gold bars or jewellery. So the investor remains attracted to the equity markets. For an ordinary small investor, whose incomes have been chasing expenditures, opting for “savings” is a hard choice to make. He has no elbow room, no real savings. But considerations of future needs and retirement planning etc. compel him to make regular savings. He is not expected to be a financial wizard or investment guide or economic expert. Instead he is attracted by such pep talk on TV and newspapers, and take such expert advice as the gospel truth.  If he buys all the arguments on such shows without proper scrutiny, he is likely to make huge costly mistakes.

Let us begin with the 11% return on investment in gold and equity. Here the catch is that no investor in gold has lost a single penny in the past 15 years, whereas only one investor out of every 100 has gained in equity in the past 15 years. That means those who make gains in the equity market, do so because others make losses. This simple arithmetic sinks with great difficulty and at times even great costs. The equity market is a risky area. Besides being highly speculative, it is prone to market machinations and manipulations. Further, it demands a very high degree of economic and financial expertise to understand the highs & lows of the equity market. Unless one possesses sound knowledge in these areas, one should not stake his hard earned and precious savings in the equity markets. In such matters, ordinarily guidance of other advisors and experts really does not help, especially the small investors trying to protect their savings from value erosion due to ever growing inflation. Added to it come the risks from economic meltdowns and other developments internationally. The equity markets are for those with tons of money- really the ones who don’t need to save! For the rich, the equity market is a means to make more money, make windfall profits and grow their investments while playing on the weakness of greed of the small investors, who are obliged to not only make savings but invest them too. If small investors understand this financial casino game, they can protect their savings. Even fixed term deposits are qualitatively better than equity. But there are better options too, if the target is not too ambitious, like dreaming of becoming a millionaire overnight or becoming Warren Buffet in a short time.

While comparing the gains from investment in gold over a period of 15 years with investment in fixed deposit, National Savings Bonds, Public Provident Fund, Insurance etc., it will be proved beyond doubt that investors in gold emerged the wiser amongst all of them. While an investment of rupees 10,000 gave a return of taxable 25,000 or so, gold gave around 45,000. These are rough estimates and exact calculations may not render wider discrepancies. The beauty of the investment in gold was that it was safe and secure, unlike equities which gave tension and palpitation. Gold beat inflation much better than other instruments. Why, then, should the small investor be confounded with the mathematics of elaborate calculations over a long period of time which is as difficult to crack as it is to remember? I feel, it is some people’s source of income, their profession to advise others and earn their bread and butter. Now, it is for the investors to take their advice or leave it. They know that the gains theory will prove more captivating than any saner advice once the listener is overwhelmed by greed.

Experience suggests that those who chose to invest in property, residential or commercial, proved to be wisest lot amongst the small investors. An investment of one million rupees in residential property appreciated to 12 million. No other instrument yielded such gains. The small investor, constrained ever for funds, contributing to provident fund, insurance, savings bonds etc. nursing a flawed view that it would be adequate savings for buying a residential property sometime in future for his own use, ends up missing the opportunity for ever. He was unable to fund a small dwelling unit in a multi-storied complex 15 years ago,  shudders to even think of buying one 15 years later. It is not difficult to draw the conclusion as to which investment is better of all. Small investors should break the spell of making huge gains in the equity markets and prioritise their investments sensibly. For an honest person, investments in housing property, gold, fixed deposits in that order are better options than equity. For a healthy view, one has to get out of another spell: that is the so called income tax savings schemes. These schemes are as misleading as the equity schemes. There is no “saving” in reality. It is to deprive the ordinary person of consumption through confusing arithmetic and alluring rhetoric. There is a lock in period when the money remains unavailable to the owner and simultaneously suffers erosion in its purchasing power. So, while 10,000 rupees may give 20,000 in a six & half years income tax saving instrument, its purchasing power goes down drastically. Consider this: if a property was available @ 1000 per sq mt 6 ½ years ago, the same comes at 4000 per sq mt or more now. Instead of blocking funds for 6 or more years in savings instruments to save income tax, one should pay the tax and wisely invest the remainder. It is better to even consume it, if that makes the family happy, for happiness is the ultimate goal of living. I realized it late, especially after health care started costing one’s life’s savings and additional billing for the children. We are living in a-moral times. If teachers and doctors have turned commercial, should we expect investment advisors to render charity service to society? In the contemporary world, money has replaced all other considerations, finer or crude. Let us also protect our money from the predators of the markets. Let us take our own decision: Gold or Equity.

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