Why Gold will give excellent returns over next 3-5 years ?

'There is always a bull market in certain asset class at any given point in time'

This brings me to the favorite investment avenue for Indians viz. Gold

Why is gold poised to give excellent returns over next 3-5 years horizon ?

As we discussed in our earlier post, an asset class when it breaks previous top on upside, it goes on to rally multiple times.

As can be seen in above chart, Gold when it broke its earlier top in 2006, it rallied 3 times in next 5 years. Now we are poised for similar pattern where gold is approaching its previous high of  ~$1800 

Also it is at 5 year high in USD terms. In INR terms, it hovered in range of 32000 - 25000 for 6 years and due to depreciating INR, it has broken out to All time high.

Now whenever an asset class breaks out of such a multi year range, the rallies don't stop at 20-30%. They go on to multiply over long term. 

Reason for rally: 

• Overall there has been loss of confidence in Central government worldwide and the way the banks are maintaining negative interest rates, it leaves very less scope for government to resort to easy monetary policy
• Overall scenario of slowing growth world wide
• Developed countries are looking at an alternative to USD due to $22 trillion debt carried by US and also due to arm twisting done by US in terms of tariffs
• Central banks buying gold: China & Russia have been buying gold as an alternative to USD due to above factors
• Flight to safety due to things like trade wars, military clashes, Corona virus scare, etc.

Gold chart for India vs International:

If you see the chart below of Gold in INR terms vs that in USD terms, it has most of the times been trending upwards in India as against the price of Gold in international markets. Also it has not seen major sustained correction to the tune of 50% or so over a 5 year period in India. Why is that so ? It's because INR has been depreciating for decades. This is a major reason why Indians should have gold in their portfolio.

Ways to invest in Gold:

If you are looking at Gold from investment perspective, buying physical gold is most inefficient way to do it. There are Gold ETF's listed which you can buy and they mirror price of Gold. Kotak Gold is best of the lot. You can simply buy it with a click of a button.

Another option is to buy stocks of Gold loan companies like Manappuram Finance and Muthoot Finance. They lend money against Gold and when the price of Gold moves up, so does the value of their collateral thereby enabling them to lending more. 

In case of recession or major market correction, Gold will act as a natural hedge since there will be flight to safety from equities to Gold.

There is no reason why Gold can't see the rally it saw from 2003-2010. For the guys out there, at the end of the day your wife will also be happy that you are buying Gold !!

Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog