Which is the Best Investment Avenue : GOLD, SILVER or SENSEX ?

This post of Personal Planners brings to you the comparison amongst the most lucrative Investment avenues for the Indian Investor – Gold, Silver and the Sensex (Stock Market).

There has been a lot of debate on – which is the best Investment avenue amongst Gold, Silver and the Sensex ? The debate has been intensified lately with Silver giving about 60% returns in the first four months of 2011. (Its per Kg. price has reached Rs. 72000 which was just around Rs. 45000 in the beginning of 2011).

The table below gives you a clear picture on how each of these investment avenues have fared in from March 31, 1981 to February 28, 2011. The prices/indices  shown are taken on the last day of each financial year and the last row gives the CAGR (Compounded Annual Growth Rate) between the two mentioned dates.

Valuation Date	Gold Price (Rs. Per 10g)	Silver Price (Rs. Per Kg)	Sensex (Index Value)
31-Mar-1981	1670	2715	173
31-Mar-1982	1645	2680	218
31-Mar-1983	1800	3105	212
31-Mar-1984	1975	3570	245
31-Mar-1985	2130	3955	354
31-Mar-1986	2140	4015	574
31-Mar-1987	2570	4794	510
31-Mar-1988	3130	6066	398
31-Mar-1989	3140	6755	714
31-Mar-1990	3200	6463	718
31-Mar-1991	3466	6646	1168
31-Mar-1992	4334	8040	4285
31-Mar-1993	4140	5489	2281
31-Mar-1994	4598	7142	3779
31-Mar-1995	4680	6335	3261
31-Mar-1996	5160	7346	3357
31-Mar-1997	4725	7345	3361
31-Mar-1998	4045	8560	3893
31-Mar-1999	4235	7615	3740
31-Mar-2000	4380	7900	5001
31-Mar-2001	4190	7215	3604
31-Mar-2002	5010	7875	3469
31-Mar-2003	5310	7695	3049
31-Mar-2004	6065	11770	5591
31-Mar-2005	6180	10675	6493
31-Mar-2006	8490	17405	11280
31-Mar-2007	9395	19520	13072
31-Mar-2008	12125	23625	15644
31-Mar-2009	15105	22165	9709
31-Mar-2010	16320	26928	17527
28-Feb-2011	20800	49600	17823
CAGR	8.79%	10.19%	16.75%

An analysis of the above data clearly demonstrates that the Sensex beats both the Silver and the Gold hands on, if we consider the CAGR of all the three for the entire period of 30 Years. The Silver comes second and Gold is at the last. However things change dramatically in favour of the Silver when we consider the returns in the last decade (March 2001 to Feb 2011). Where Gold and Sensex have given returns of about 5 times, Silver has given returns of about 7 times. The returns would be about 10 times if consider it till April 23, 2011.

The question now is what should the investors do? There is absolutely no doubt that in the very long term nothing can beat the Equity Markets (Sensex, Nifty or proven Equity Mutual Funds), however, the Gold and the Silver could be a better option in the short and medium term as they are more consistent and less volatile (and hence safer)  as compared to the Equity Markets.

The best option however would be to have all the three in your portfolio, this will simply diversify your portfolio and get benefits of each one of them, and then occasionally rebalance your portfolio as per your need, risk profile and the economic environment. Now you may again ask – how much of my portfolio should be occupied by Gold and Silver? Well if you ask this from the more renowned Financial Planners or Portfolio Managers, they would typically suggest that one should have around 5 to 10 percent of Gold in their  portfolio as it is just a hedge against inflation and they would not mention anything about Silver. However, the returns generated in the last decade has clearly indicated that they are just not only a hedge against inflation but are serious investment vehicles. So, I would personally suggest that you should invest about 10 to 20 percent each in both Silver and Gold of your portfolio through instruments like Gold ETFs, Gold Mutual Funds (Reliance and Kotak), e Gold and e Silver and keep on adding them systematically over a substantial period of time. The equity should definitely have a larger chunk and should be invested in systematically with a long term perspective.  (Just read my last post to know what long term means and what it can generate).

Arguments in Favour of Sensex:

1. Sensex as the barometer of Indian Equity Markets and Indian Economic growth is expected to give better returns in the long term as compared to any other investment avenue.
2. As per the current Income tax law, the returns generated by Sensex (Equity) is Tax free under long term capital gains. (If invested for more than an year).
3. With the economic activity in India poised to show its best performance in the coming decade, the Sensex is expected to reach the 100,000 mark by 2020, if every thing goes on track.

Arguments in Favour of Silver:

1. Silver is a semi precious metal and is witnessing huge demand from the middle class population and is also used by Electronic and Chemical industries as a raw material as it is a very good conductor.
2. Silver is being actively traded in commodity markets and with the availability of instruments like e Silver, the prices are expected to grow even more.
3. Returns in Silver have beaten that of Gold in the long term, medium term as well as the short term.

Arguments in Favour of Gold:

1. Gold is a precious metal and is a status symbol in India, and therefore there is an evergreen and growing demand of Gold in the ornaments and bullion markets.
2. Gold  is being actively traded in commodity markets and with the availability of instruments like Gold ETFs, Gold MFs and Gold Loans, its demand and prices are expected to grow substantially over a period of time.
3. Gold is extremely useful at the time of economic crisis, war etc. as its value appreciates well in such conditions as compared to Sensex or Stock Markets which may give even negative returns in crisis situations.

Awaiting your feedback and ratings for this Post.

Prashant.