Gold, a rare earth metal, was once used as a medium of exchange and was of immense value. Later it was replaced by paper money as a medium of exchange.
However, the yellow shiny metal has not lost its shine and remains extremely valuable even today.
Due to its unique properties, this versatile metal finds application in various fields such as electronics, aerospace technology, intricate jewelry, etc.
Gold is also considered a safe haven in the investment world. It is probably the safest of all assets.
First, gold is a scarce resource, which implies a limited supply. Therefore, unlike paper money which loses its value as more of it is printed, gold does not lose its intrinsic value as easily.
Second, it has several applications that are in increasing demand.
Third, it is a tangible asset and is widely accepted around the world.
Fourth, it is widely regarded as a hedge against inflation.
When inflation is high, there is high liquidity in an economy. A lot of money is chasing a few things, driving their prices higher. Since gold is a scarce commodity, it also becomes more expensive in the process.
The list continues…
All these factors combined make the yellow metal a perfect store of value.
Investing in gold therefore carries a low risk. And by the rules of the game, with lower risk comes low return.
The achievements of the past decade are proof of this. Gold has grown barely 10% in absolute terms over the past decade.
These returns trickle down further when we factor in storage costs, impairments, taxes, etc.
When it comes to investment, people in India like to play it safe. Gold, being the safest investment, has long been a popular choice.
India is one of the largest consumers of gold in the world.
While this is something to brag about, investors are actually losing some of their returns by investing only in gold.
The Nifty 50 has grown at a CAGR of 14.3% over the past decade when gold grew at a meager CAGR of 1.1%.
Investors have two options here. They can choose to settle for low returns by trading risk, or they can choose high returns by trading security.
But what if you could invest in an asset that offers the safety of gold and yields a return comparable to that of equity?
Any asset that fits well are companies that have their core businesses focused on gold. These include gold finance companies and gold jewelry companies.
This article compares gold companies to physical gold to see which would be a better investment.
India is one of the largest consumers of gold in the world and offers a huge market for gold financing.
Gold finance companies provide loans against gold as collateral. While every bank in India offers gold loans, we focus 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 stock exchanges in 2011. Since then, the share price has zoomed in 10 times. It is a multibagger in the truest sense of the word.
Muthoot Finance has grown at a CAGR of 25.9% over the past decade. It is very clear that an investor would have been better off investing in Muthoot Finance than in physical gold.
Manappuram Finance, Muthoot’s closest competitor, did not perform as well. But the stock outperformed physical gold by a margin of 10%. However, the premium is not enough to trade the security offered by gold. Therefore, investors would have been better off investing in physical gold in this case.
The craze for gold jewelry in India never ends. Jewelery remains the biggest driver of gold demand in India. So it makes sense to see how the best gold jewelry manufacturers in India stack up against physical gold.
First, we have Titan, the largest jewelry company in India. Although the company produces a range of fashion accessories, the jewelry division accounts for more than 50% of its total sales.
Titan’s stock price has risen more than 1,000% in the past decade. Titan certainly gave gold a run for its money.
Here’s some interesting data on Titan…
Even a small investment of Rs 1,000 a month in Titan’s shares, since 2002, would have yielded mouthwatering returns.
Watch how the power of compounding has gone wild…
Another famous jeweler in the listed arena is Tribhovandas Bhimji Zaveri (TBZ). It operates one of the largest jewelry chains in India. The company has 37 stores nationwide.
TBZ debuted on the Indian stock exchanges in 2011. Unlike Titan, TBZ’s performance was a real let down. The company underperformed physical gold. In fact, the share price has never reached the issue price since the IPO.
While Titan and TBZ are largely domestic players, there are other jewelry makers that focus more 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 the gold produced in the world.
Exporting gold products is not as lucrative as it sounds. Titan once exported gold products but had to close its export division due to thin margins.
Rajesh Exports has defied all odds by being successful in the export business. This is due to the company’s different approach.
The company is the only integrated player in this space. This means it is present throughout the value chain, from refining to retail.
This helps the company keep its costs under control, which in turn results in higher margins. Its exceptional performance is reflected in the share price.
The share price of Rajesh Exports has risen at a CAGR of 20.8% over the past decade compared to gold’s CAGR of 1.1%.
Physical gold or gold companies: which seems to be better in the long run?
After considering the above points, it is clear that gold companies outperform physical gold in most cases.
That’s why gold companies seem like the obvious choice, doesn’t it?
However, investing in gold or gold companies depends on your risk appetite.
Investing in gold companies carries a high level of risk. So if you are more of a risk taker, you can put some of your capital into high quality gold companies.
But be very careful when investing in these companies. You don’t want to end up in companies like TBZ where you could potentially lose your hard-earned money.
We cannot emphasize enough how important fundamentals are when investing in stocks. Thoroughly analyze the fundamentals of a company before investing money in it.
If you are risk averse and want to play it safe, investing in physical gold is the best option.
Since we’re on the subject of gold, don’t forget to watch Co-head of Equitymaster Rahul Shah’s video where he spills the beans on gold and discusses whether it really sweetens your stock portfolio in the long run.
You can watch the video here: Does Gold Make Your Wallet Crash Proof?
Gold Exchange Traded Funds (ETFs) are another alternative to physical gold.
To shed more light on the subject, India’s #1 trader Vijay Bhambwani recorded a video last year discussing whether gold should be bought in physical form or electronic form.
We highly recommend watching the video to get a better idea of gold ETFs. Video Link – Gold ETFs or Gold Bullion?
Have fun investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
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