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You are here : IndiaNotes >> Market Action >> Fundamental

Numerical Analysis: Gold Vs. Sensex

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By: Aniruddha Meher, MSc. MBA


Which investment is better, gold or equity? This is an eternal debate since the time stocks were being sold informally under shades of trees. The question has not lost its relevance even today, when market experts advance the case of equity investments especially where the results seem impressive. Let us first understand the characteristics of the two “players” – gold and equities.


Who wins? According to an analysis of Factset Data from April 1979 to August 2015, Sensex and gold display common traits, such as a similar win:loss ratio, and a similar coefficient of variation. The proportion of risk remains the same; the magnitude of possible gains and losses is what separates the two. The key difference between the two is: how much an investor is hoping to win versus how much he is prepared to lose.


Table 1: Sensex & Gold- Win:Loss



Asset Performance Dependence?


An important factor is whether the two assets perform at the same time or they counter-act each other. As can be seen in the table below, when Sensex is on the rise, gold underperforms, and when Sensex falls, gold almost surely outperforms. This shows that gold is not the competitor, but rather a safe haven for investors when the markets are shaky.


Table 2: Gold & Sensex: Performance



FIIs’ Wisdom


FII inflows are highly correlated with Sensex price movements, so much so that the movement of market and FII inflows can be treated as one and the same. Hence, it is difficult to guess if FIIs cause market returns, or market returns dictate FII interest. For all possible interpretations, it can be assumed that FIIs are simply another player in the market with same information available to Indian investors. Some market experts have been suggesting that Indian investors sold their share to FII and turned their cash into gold. How true is this? The net gold import figure is a continuously increasing entity, but FII flows vary every year, halving or even going into negative territory for a while. The percent ownership is constant for past eight years, whereas gold imports have increased 2-5 times (as seen in Table 3). There is no visible direct relationship between Gold import and FII ownership or FII flows. Thus, the above belief that money from FII inflows goes into gold has no factual backing.


Table 3: FII Flows & Gold Imports



So what is better, investment in gold or Sensex?


As we saw above, whenever the markets move up, gold underperforms. And when markets start to go south, then people rush to their favorite safe haven – gold. Gold is effectively an insurance that protects an investor’s portfolio from the downsides of equity investments. Thus, it is not a question of whether to invest in either; it is a question of when to be invested in what. If you believe the markets will continue their meteoric rise for future, choose to invest in equity. But if you are worried this is an illusion that is bound to break soon, then gold could be your savior.

 




About Multi-Act Equity Consultancy

Multi-Act is a rare unbiased, independent boutique house. It offers international equity research, consulting/advisory & portfolio management services to large business families, UHNIs, investment managers and intermediaries around the globe. Multi-Act can be accessed at http://multi-act.com.


For more information please write in to editor@indianotes.com


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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