Gold has social and cultural significance. For us, gold means wealth and prosperity. Celebrations like weddings, Diwali and Dhanteras are considered to be incomplete without it.
No wonder we, as Indians, account for almost one-fourth of all consumption of gold globally. Yes, really!
We love the yellow metal 🙂
The desire for gold is the most universal and deeply rooted commercial instinct of the human race.
While gold has ornamental and cultural significance for us, its investment properties are also equally good. Gold, as some form of currency or store of value, has been in circulation for centuries. As a long term store of value, it is an effective hedge against inflation while also exhibiting strong downside protection properties one would expect from an effective portfolio hedge.
Gold and silver are money. Everything else is credit.
: J.P. Morgan
Factors that affect the gold price
The gold price is affected by market supply and demand along with speculation. Gold price also relates to the USD exchange rate, oil and other commodities prices, economic instabilities and financial crises, and other world events such as wars, natural hazards and disasters. Abken (1980) and Salant & Henderson (1978) found inflation, gold demand and supply, world events, and gold auction as the determinant of gold price. More recently Tully and Lucey (2007) found that the US dollar is the main macroeconomic variable that affects gold returns. So, for Indian investors, investing in gold along with it being a macroeconomic hedge to crash in stock prices is also a currency hedge against rupee devaluation.
Enter digital gold
Digital gold is an investment option where you can buy 24K 99.9% pure gold online in denominations as low as Rs 100. It is a simple, straightforward and transparent way to buy and sell gold online.
Think of it as physical gold, except that you don’t have to worry about purity, making charges, safe storage or ease of selling.
How digital gold works?
The amount of digital gold you purchase online is backed by 24 K 99.9% pure gold which is placed in a secured vault. To buy, you place a buy order on Kuvera and we, with the help of our partners Augmont Gold, buy the gold at market price and keep it in a secure vault for you. Similarly, when you sell, we sell some of your gold at the then market price and deposit the cash into your bank account. Completely digital and completely secure.
How to buy digital gold on Kuvera?
It couldn’t be easier. Enter the amount or the gms you want to buy and pay by UPI, netbanking or card. Simple as that!
Why invest in digital gold (over physical gold)?
1/ Purity Certified 24K 99.9% pure gold. As good as it gets.
2/ Security – Stored in vaults by BRINKS, the global leader in asset security. No theft issues, no bank lockers, nada.
3/ Access – Sell it online at the prevailing gold price for immediate cash or request for home delivery. Your gold, your way.
4/ Quantity – Pay only for gold. No making charges, cuts or commissions. Get more gold.
Buy it when you want to invest in gold and sell it when you need money – all from the comfort of our app. Digital gold, thus, overcomes some of the traditional challenges of investing in gold.
Why invest in digital gold (over Gold ETF and Gold Mutual Funds)?
It is a known fact that Gold ETFs and Gold Mutual Funds do not track the price of physical gold closely. The culprit is fund expenses.
The NAV for Gold ETF or Mutual Funds is computed after deducting the fee of the asset management company plus storage and custodian charges, which can all add up. Over time this can create a significant mismatch in gold returns and that of the gold ETF or Mutual Fund.
In the chart below, we look at 5-year returns from one Gold ETF (ICICI) and one Gold MF (Reliance).
The ETF gained 34.83% while the MF gained 33.01%. Between the same time (19 Sep 2014 to 6 Sep 2019), the price of 22K gold went up by 51.3% (from Rs 2,525 / gm to Rs 3,820 / gm).
That’s a big performance drag for using ETF and MF for investing in gold.
Why invest in digital gold (along with equity MFs)?
Going back to 1990 and looking at monthly data we can see that Nifty50 returned higher on average, but with higher standard deviation or risk. Risk-adjusted returns are still marginally better for gold but not by much.
Gold also has a better max drawdown (a measure of maximum loss possible) of -25% (vs -55% for the Nifty 50). That is an investor in Nifty50 would have faced a maximum peak to trough decline in the portfolio value of -55%. In the same time, an investor in Gold would have a faced a maximum peak to trough decline of -25%.
| 1990 Onwards Monthly | Gold | Nifty50 |
| Return | 10.7% | 15.6% |
| StdDev | 15.9% | 27.2% |
| Return / StdDev | 0.67 | 0.57 |
| Max DrawDown | -25% | -55% |
What gold loses in return expectation it more than makes up for in correlation and thus diversification benefits. Gold, you see, is a team player. And at times when Nifty 50 is not performing due to crash fears, wars, natural hazards or disasters, gold does well.
It helps you tide over the bad times much better. Or you could say, when the going gets tough, gold gets going.
In the past 29 years of data, the correlation of monthly gold returns and monthly Nifty50 returns is just 0.3%!
Of the 348 monthly returns in our sample, there are 178 instances where the returns on gold and returns on Nifty 50 have opposite signs. That is if gold posted positive returns, Nifty 50 posted negative returns and vice versa. This is exactly what diversification is about – two assets, each with positive expected returns but no correlation in returns.
So, what does that mean at a portfolio level? Well, let’s look at a portfolio that is 50% gold and 50% nifty 50 at all times –
| From 1990 Monthly | Gold | Nifty50 | 50% Gold – 50% Nifty 50 |
| Return | 10.7% | 15.6% | 13.1% |
| StdDev | 15.9% | 27.2% | 15.8% |
| Return / StdDev | 0.67 | 0.57 | 0.83 |
| Max DrawDown | -25% | -55% | -27% |
The combined portfolio has highly superior risk-adjusted returns. And the drawdown number is as close as gold’s alone. Lawrence (2003) also concludes that the low correlation between gold and stock returns makes gold an efficient portfolio diversifier.
Let’s look at two such episodes in the past in a lot more details. The bursting of the dot com bubble of 2000 – 2002 and the great financial crisis of 2008-2009.
The dot com burst of 2000 – 2002: The dot com bubble burst in early 2000 bringing an end to excesses in dot com funding and valuations in the US. Even though the bubble was mostly localized to NASDAQ the bursting of the bubble had consequences for Indian markets too. Between 2000 to 2002 Nifty50 proceeded to fall 40%. As a flight to safety and crash hedge, Gold had outsized gains of ~30% during the same time period.
The Global Financial Crisis of 2008: As per Wikipedia, “the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.” The crisis had a severe impact on global financial markets and Nifty50 saw a monthly drawdown of ~50% during that time. Gold again shone as the crisis hedge and rallied ~30% to protect from some of the impacts of the stock market meltdown.
Just based on the correlation data, it is clear that investors should take gold seriously and have exposure to it as a macro-economic hedge, as a currency hedge and a saviour in bad times.
That it also returned ~11% during the past 29 years is just icing on the cake.
Key Takeaways
1/ Gold has properties of both a commodity and a currency. Gold is unique among commodities due to gold’s traditional role as a safe-haven and store of value.
2/ Gold returns have a low correlation to equity returns especially during wars, market crashes, and disasters. This makes gold an effective portfolio diversifier.
3/ Digital Gold solves the issues of owning and safekeeping digital gold.
The desire of gold is not for gold. It is for the means of freedom and benefit.
:Ralph Waldo Emerson
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