How bank deposits score over gold

Don’t let the recent returns on gold bamboozle you into replacing your FDs and other investments with gold. It is not surprising that investors are seeking out gold after it has completed a nine-year run of positive returns.Second-guessing gold prices is even trickier than forecasting the Sensex, so it certainly isn’t a predictable investment.

To anyone taking stock of his/her portfolio today, choices such as fixed deposits or bonds would seem positively foolish when compared with gold. For gold, in rupee terms, has delivered an eye-popping return of 25 per cent on a compounded annual basis over the last five years, while deposits have barely averaged 7 per cent. But don’t be fooled because here are four ways in which fixed deposits score over gold.

GOLD LESS PREDICTABLE

Most people flock to gold for its ability to serve up a ‘predictable’ return in turbulent times. But such investors tend to be taken in by gold’s recent record. With two full-blown economic crises and worries about sovereign default haunting markets, it is no surprise that gold has delivered a 25 per cent return (in rupees) since 2007.

This, however, is a recent phenomenon. Historically, 20 per cent annual returns on gold have been the exception rather than the rule. In fact, a rolling return analysis for the past 20 years (measuring gold price returns at weekly intervals, for five years at a time) shows that gold has managed a 20 per cent return less than one-fifth of the time. What is more, gold didn’t manage even an 8 per cent annual return about 45 per cent of the time in the last 20 years. Plus, there was a long stretch in 2001 when investors suffered losses on their gold holdings after a five-year wait.

These numbers suggest that gold price gains are as much a ‘paper’ profit as returns from the stock market. They can change dramatically based on the point of entry and exit. Whether you make money on gold depends on how lucky you are in timing your purchases (and sales too). Second-guessing gold prices is even trickier than forecasting the Sensex, so it certainly isn’t a predictable investment.

Contrast this with good old bank deposits. You will never make 25 per cent a year on them. But you can invest in them at any time, knowing exactly what you will receive every year by way of interest. One-year bank deposits have delivered a 5.5-9.5 per cent return in the last ten years, averaging 7 per cent a year.

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Posted by admin on Jan 23 2012. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry