Betting on gold to bring some shine in times of gloom

Gold has returned fabulous returns of over 45 per cent in the last one year.

Gold has returned fabulous returns of over 45 per cent in the last one year. In fact,13 per cent in the last one month itself. This has prompted global fund managers to sit up and add gold in their portfolio. But investors wonder if there is still some upside left,especially in the backdrop where equity as an asset class is extremely volatile and there are fears of a recession in the global economy.

The yellow metal is often projected as a hedge against inflation and an asset class to which big investors turn to whenever their is a turmoil in the world economy. A hard look at the performance of gold in the past few decades,however,reveals that it does not quite really have a direct correlation with either the performance of the economy,inflation or equity markets.

Gold was trading at an annual average price of $444 in 2005 and zoomed to $870 in 2008. It touched the four-figure mark and stood at $1,220 in 2010. In calendar 2011,it crossed the $1,800 mark. In the past gold may not have given returns to even take care of inflation,but experts believe the rally this time to be directly related to events in the developed economies like US,Japan and European countries.

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There were no serious problems in earlier decades despite slowdowns. Paper currencies were stable and hence gold prices did not rise. The scenario has changed since 2001,especially after the sub-prime crisis. There is no solution in sight for US,Europe or Japan. This augurs well for gold, says Kishore Narne,vice president,Anand Rathi Commodities.

Is gold a hedge against inflation? Price data since 1970 suggests gold has provided positive returns only during 1970-1980 and since 2001 till now. In 1980,prices in the international markets touched $850 (it doubled from $377 to $850 within three months),a record high. But it crashed to $474 the same year. The period marked double-digit inflation in several countries,the USSR (then) invasion of Afghanistan and manipulation of prices by the infamous Hunt Brothers.

Thereon,gold prices posted a steady decline for the next two decades,dropping to $364 in 1985. The only exception was 1987 when prices bounced back to $531,but started sliding next year onwards. In 2001 gold hit a low of $294 and could equal the 1987 price of $531 only in 2005.

Compared with equity too,gold returns lag those of S&P 500. The inflation adjusted price of gold since 1980 should be over $2,800. Gold has not even given inflation adjusted returns,says Rajnish Kumar,executive vice president,Fullerton Securities and Wealth Advisors. Experts believe that to give inflation adjusted return considering the last 30 years period,gold has lot of catching up to do. Prices are not over-stretched,they probably are catching up, says Kumar.

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Besides,there is no positive correlation with economic activity either. According to a World Gold Council report,gold generated 88 per cent returns; during the second US recession which lasted six months from January 1980 to July 1980,prices fell six per cent; in the third recession that lasted 16 months starting July 1981,prices first dropped 5 per cent but ended up 7 per cent up by the end of recession. The prices declined between July 1990 and March 1991 US recession. During the dot-com bust of 2001,though,prices rose only to correct in the downturn of 2008.

With equities giving negative returns,more investors are looking at gold as a safe investment which has given more than 15 per cent returns since July this year.