Gold, a rare earth metal, was once used as a medium of exchange and carried immense value. Later, it was replaced with paper money as a medium of exchange.
However, the yellow lustrous metal has not lost its sheen and continues to be extremely valuable even today.
Due to its unique characteristics, this versatile metal finds application across different domains such as electronics, aerospace technology, intricate jewelery, etc.
Gold is also considered to be a safe haven in the investing world. It’s probably the safest among all assets.
First, gold is a scarce resource which implies limited supply. Therefore, unlike paper money which loses its value as more of it is printed, gold does not lose its intrinsic value very easily.
Second, it has several applications which ever increasing demand.
Third, it’s a tangible asset and is widely accepted across the globe.
Fourth, it’s widely regarded as a hedge against inflation.
When inflation is high, there is high liquidity in an economy. A lot of money chases a few things, driving their prices higher. Gold being a scarce commodity also gets pricier in the process.
The list goes on…
All these factors combined, make the yellow metal a perfect store of value.
So, investing in gold entails low risk. And as per the rules of the game, with lower risk come low returns.
Its performance over the last decade is a testimony of this fact. In the last decade, gold has barely grown 10% in absolute terms.
These returns trickle down further when we take into account storage charges, impairment costs, taxes, etc.
Playing it safe
When it comes to investments, people in India like to play it safe. Gold, being the safest investment, has been a popular choice for a long time.
India is one of the largest consumers of gold in the world.
While this is something to boast about, investors are actually losing on some returns by investing only in gold.
The Nifty 50 has grown at a CAGR of 14.3% in the last decade when gold grew at a meager 1.1% CAGR.
So, investors have two options here. They could either choose to settle for low returns by trading off risk or they could opt for high returns by trading off safety.
However, what if you could invest in an asset that provides the safety of gold while yielding returns similar to equity?
Any asset that fits well are companies that have their core operations centered around gold. These include gold financing companies and gold jewelery firms.
This article compares gold companies with physical gold to find which would be a better investment.
India being one of the largest consumers of gold in the world, provides a huge market for gold financing.
Gold financing companies provide loans against gold as collateral. Although every bank in India offers gold loans, we are focusing 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 listed on the bourses in 2011. Since then, the stock price has zoomed 10 times. It has been a multibagger in the truest sense.
Muthoot Finance has grown at a CAGR of 25.9% over the last decade. It’s 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 perform equally well. But the stock has outperformed physical gold by a margin of 10%. However, the premium is not enough to justify trading off the safety offered by gold. Therefore, investors would have been better off by investing in physical gold in this case.
The craze for gold jewelery in India is never ending. Jewelery remains the biggest driver of gold demand in India. Thus, it is only logical to see how India’s top gold jewelery manufacturers fare against physical gold.
First up we have Titan, the largest jewelery company in India. Although the company manufactures a range of fashion accessories, its jewelery division accounts for more than 50% of its total revenue.
Titan’s stock price has rallied more than 1,000% during the last decade. Titan, for sure, gave gold a run for its money.
Here’s an interesting data on Titan…
Even a tiny investment of Rs 1,000 per month in the stock of Titan, since 2002, would have led to mouth-watering returns.
Take a look at how the power of compounding has gone wild here …
Another famous jeweler in the listed arena is Tribhovandas Bhimji Zaveri (TBZ). It operates one of the largest jewelery retail chains in India. The company has 37 retail stores across the country.
TBZ made its debut on the Indian stock exchanges in 2011. Unlike Titan, TBZ’s performance has been a real bummer. The company has underperformed physical gold. In fact, the stock price has never touched its issue price ever since it got listed.
While Titan and TBZ are largely domestic players, there are other jewelery makers who are more focused on international markets.
Rajesh Exports is one such company.
Rajesh Exports is the largest exporter of gold products from India. The company processes 35% of gold produced in the world.
Exporting gold products is not as lucrative as it sounds. Titan once exported gold products but had to discontinue its exports division due to thin margins.
Rajesh Exports has defied all odds by being successful in the exports business. This is due to its different approach towards the business.
The company is the only integrated player in this space. This means that it’s present across the entire value chain from refining to retailing.
This helps the company to keep its cost under control which in turn results in higher margins. Its exceptional performance is reflected in its share price.
Rajesh Exports’ stock price has gone up at a CAGR of 20.8% in the last decade compared to gold’s CAGR of 1.1%.
Physical Gold or Gold Companies: Which Seems to be Better in the Long Run?
After taking into consideration the points above, it’s clear that in most cases, gold companies tend to outperform physical gold.
Therefore, gold companies seem to be the obvious choice, don’t they?
However, to invest in gold or gold companies depends on your risk appetite.
Investing in gold companies entails high risk. So, if you are more of a risk taker then you can put a portion of your capital in quality gold companies.
But be very careful while investing in these companies. You do not want to get yourself into companies like TBZ where you could possibly lose your hard earned money.
We can not stress enough on the importance of fundamentals while investing in equities. Analyze the fundamentals of a company thoroughly before putting any money into it.
If you are risk averse and want to play it safe, then investing in physical gold is the best option.
Since we’re talking about gold, do not forget to check out Co-head of Equitymaster Rahul Shah’s video where he spills the beans on gold and discusses whether it really sweetens your equity portfolio over the long run.
You can watch the video here: Does Gold Make Your Portfolio Crash-Proof?
Gold exchange traded funds (ETFs) are another alternative to physical gold.
To shed more light on this topic, India’s # 1 trader Vijay Bhambwani had recorded a video last year discussing whether to buy gold in physical form or in electronic form.
We highly recommend you watch the video to get a better idea on gold ETFs. Video link – Gold ETFs or Gold Bullion?
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
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