The rise of coronavirus pandemic caused widespread panic amongst investors. Stock markets being highly volatile has been badly affected by the situation. However, gold being a haven has seen a remarkable surge in its value. To choose on the better option, for a better insight can be obtained by observing the trajectory of both markets over 10 years it is better to compare their markets over the 10 years
SENSEX AND THE BSE 500, the Indian market indices recorded a compound annual growth rate of 9.05% and 8.5% over the last 10 years. Amidst the economic slowdown of 2012, it showed a gradual increase in the period from 2010 to 2015. Followed by a subsequent rise from February 2016 till January 2020. The growth of SENSEX to over 40000 points by December 2019 from 17,500 points indicates the wealth generated through equities across sectors.
The rapid spurt of COVID-19 smashed the global market. The lockdown that leads to a halt of economic activities adversely affecting the markets and shrunk the wealth-generating prospects. This leads to a steep fall of Indian markets to 27000 base points by the start of April 2020. The market experienced a fall of around 40%.
Whereas striking rise was seen in the gold market. Usually, people buy gold to diversify their portfolio, when they sense any crisis. Gold price saw a rise from Rs.8000 to Rs.25000 in 2008, while from 2016 it ran to a level up to Rs.31000 per 10 gms of gold. Now as the economy declines further rise in gold price is visible and as of today, it has risen to Rs.50,900. During times of turmoil, physical assets and gold are the better and safest options. COVID-19 cases have hindered growth globally. A downward trend for equity markets was forecasted by certain global financial institutions and consulting firms.
Considering the pandemic situation and its consequences, as a post-pandemic measure, Reserve bank and Global banks have shown readiness to decrease interest. Since interest rates and gold rates are negatively correlated they aren’t affected by the decline in economy whereas its impact is likely to hit the equity markets adversely.
Recently the government of India announced a package of Rs. 20 lakh crore for economic revival. This too is likely to hurt the financial markets and bond asset classes. The trend for gold is likely to continue with increased liquidity and limited activity. Hence it is necessary to look up for gold investment options that can mitigate the arising risk. Gold-backed options like gold exchange-traded funds are a promising option.
However, when the economy and markets are already in their struggling stage, equities become cheap and gold is becoming expensive so a shift from equity to gold during this period might not be a good option and can welcome losses.
Gold is a good portfolio diversifier and it hedges against inflation and deflation alike. And having gold in your portfolio can help to mitigate the risk of inflation and uncertainties, should be in a portfolio of up to 15%. Whereas equities deliver in the long term, they are better for long term wealth accumulation.