Gold, a rare earth metal, was once used as a medium of exchange and had immense value. Later, it was replaced by paper money as a medium of exchange.
However, the shiny yellow metal has not lost its luster and continues to be extremely valuable even today.
Due to its unique characteristics, this versatile metal finds application in different fields such as electronics, aerospace technology, intricate jewelry, etc.
Gold is also considered a safe haven in the world of investors. It is probably the safest of all assets.
First, gold is a scarce resource which implies a limited supply. Therefore, unlike paper money which loses value as it is printed, gold does not lose its intrinsic value very easily.
Secondly, it has several applications whose demand keeps increasing.
Third, it is a tangible asset widely accepted around the world.
Fourth, it is widely seen as a hedge against inflation.
When inflation is high, there is high liquidity in an economy. Big money chases a few things, driving up their prices. Since gold is a rare commodity, it also becomes more expensive in the process.
The list continues…
All these factors combined make the yellow metal a perfect store of value.
Thus, investing in gold carries little risk. And by the rules of the game, lower risk means lower returns.
His performance over the past decade bears witness to this. Over the past decade, gold has barely risen 10% in absolute terms.
These returns are reflected more when we take into account storage costs, depreciation costs, taxes, etc.
When it comes to investments, Indians like to play it safe. Gold, being the safest investment, has been a popular choice for a long time.
India is one of the biggest consumers of gold in the world.
While there’s plenty to brag about, investors actually lose some returns by investing only in gold.
The Nifty 50 has risen at a CAGR of 14.3% over the past decade, while gold has advanced at a meager 1.1% CAGR.
So, investors have two options here. They could either choose to settle for low returns by eliminating risk, or opt for high returns by eliminating safety.
However, what if you could invest in an asset that offers the safety of gold while offering similar returns to stocks?
Any asset that is a good fit are companies whose primary business is centered around gold. These include gold finance companies and gold jewelry companies.
This article compares gold companies to physical gold to find which would be a better investment.
India being one of the largest consumers of gold in the world, offers a huge market for gold financing.
Gold finance companies provide loans against gold as collateral. Although every bank in India offers gold loans, we focus exclusively on finance companies that have gold as their mainstay. These include Muthoot Finance and Manappuram Finance.
Muthoot Finance is India’s largest gold finance company. It went public in 2011. Since then, the stock price has climbed 10 times. It has been a multibagger in the truest sense of the word.
Muthoot Finance has grown at a CAGR of 25.9% over the past decade. It is very clear that an investor would have been better off investing in Muthoot Finance rather than investing in physical gold.
Manappuram Finance, Muthoot’s closest competitor, did not fare as well. But the stock outperformed physical gold by a margin of 10%. However, the premium is not enough to justify exchanging the security offered by gold. Therefore, investors would have been better off investing in physical gold in this case.
The gold jewelry craze in India is endless. Jewelery remains the main driver of gold demand in India. So, it makes sense to see how India’s top gold jewelry makers fare against physical gold.
First, we have Titan, the largest jewelry company in India. Although the company manufactures a range of fashion accessories, its jewelry division accounts for more than 50% of its total revenue.
Titan’s stock price has risen more than 1,000% over the past decade. Titan, for sure, gave gold its money’s worth.
Here is an interesting fact about Titan…
Even a small investment of Rs 1,000 per month in Titan stock, since 2002, would have led to mouth-watering returns.
Take a look at how the power of compounding has been unleashed here…
Another famous jeweler in the listed arena is Tribhovandas Bhimji Zaveri (TBZ). She operates one of the largest jewelry retail chains in India. The company has 37 retail stores across the country.
TBZ debuted on the Indian exchanges in 2011. Unlike Titan, TBZ’s performance was a real disappointment. The company underperformed physical gold. In fact, the stock price has never touched its issue price since its IPO.
While Titan and TBZ are largely domestic players, there are other jewelry manufacturers that focus more on international markets.
Rajesh Exports is one such company.
Rajesh Exports is the largest exporter of Indian gold products. The company processes 35% of the gold produced in the world.
Exporting gold products is not as lucrative as it looks. Titan once exported gold products, but had to drop its export division due to low margins.
Rajesh Exports has defied all odds by succeeding in the export business. This is due to its different approach to business.
The company is the only integrated actor in this space. This means that it is present throughout the entire value chain, from refining to retail.
This helps the business control costs, which results in higher margins. Its outstanding performance is reflected in its share price.
Rajesh Exports’ share price has grown at a CAGR of 20.8% over the past decade compared to gold’s CAGR of 1.1%.
Physical gold or gold companies: which seems to be better in the long term?
After considering the above points, it is clear that in most cases, gold companies tend to outperform physical gold.
Therefore, gold companies seem like the obvious choice, right?
However, investing in gold or gold companies depends on your risk appetite.
Investing in gold companies involves high risk. So, if you are more of a risk taker, you can invest some of your capital in quality gold companies.
But be very careful when investing in these companies. You don’t want to get into businesses like TBZ where you could potentially lose your hard-earned money.
We cannot stress enough the importance of fundamentals when investing in stocks. Carefully analyze a company’s fundamentals before investing money in it.
If you are risk averse and want to play it safe, investing in physical gold is the best option.
While we’re on the subject of gold, be sure to watch Equitymaster co-head Rahul Shah’s video where he spills the beans on gold and discusses whether it really sweetens your long-term equity portfolio.
You can watch the video here: Does gold make your wallet unbreakable?
Exchange-traded funds (ETFs) on gold are another alternative to physical gold.
To shed some light on this topic, India’s No. 1 dealer, Vijay Bhambwani, recorded a video last year discussing whether to buy gold in physical or electronic form.
We highly recommend watching the video to get a better idea about gold ETFs. Video link – Gold ETF or Gold Bullion?
Warning: This article is for information only. This is not a stock recommendation and should not be treated as such.
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