Gold, a rare earth metal, was once used as a medium of exchange and carried enormous value. Later, it was replaced with paper money as a tool of exchange.
However, the shiny yellow metal did not lose its luster and continues to be very valuable to this day.
Due to its unique properties, this versatile metal gets applications across different domains such as electronics, aerospace technology, intricate jewelry, etc.
Gold is also considered a safe haven in the world of investing. It is probably the safest of all assets.
First, gold is a limited resource which implies limited supply. Thus, unlike banknotes that lose their value because more of them are printed, gold does not lose its intrinsic value easily.
Second, it has several applications that are constantly increasing in demand.
Third, it is a tangible asset and widely accepted around the world.
Fourth, it is widely regarded as a hedge against inflation.
When inflation is high, there is high liquidity in the economy. A lot of money chases some things, driving their prices higher. Gold as a limited commodity is also getting more expensive in the process.
The list goes on…
All these factors are combined, making the yellow metal the perfect store of value.
So, investing in gold requires low risk. And according to the rules of the game, with lower risk comes a lower return.
His achievements over the past decade are proof of this fact. In the past decade, gold has barely grown 10% in absolute terms.
These returns are reduced when we take into account storage charges, impairment costs, taxes, etc.
Play it Congratulations
When it comes to investing, people in India like to play it safe. Gold, as the safest investment, has been a popular choice for a long time.
India is one of the largest consumers of gold in the world.
While this is something to be proud of, investors actually lose some returns by investing only in gold.
Nifty 50 has grown at a CAGR of 14.3% in the past decade when gold grew at a small CAGR of 1.1%.
So, investors have two options here. They can either choose to settle for low returns by switching risks or they can choose high returns by switching security.
Still, what if you could invest in an asset that provides gold security while generating returns similar to equities?
Any suitable asset is a company that has their core operations centered around gold. These include gold financing companies and gold jewelry firms.
This article compares gold companies with physical gold to find better investments.
India as one of the largest consumers of gold in the world, provides a huge market for gold financing.
Gold financing 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 the largest gold finance company in India. It was listed on the exchange in 2011. Since then, the stock price has zoomed 10 -fold. It has become a multibagger in the true sense of the word.
Muthoot Finance has grown at a CAGR of 25.9% over the past decade. It is very clear that investors are better off investing in Muthoot Finance than investing in physical gold.
Manappuram Finance, Muthoot’s closest competitor, did not perform as well. But the stock has outperformed physical gold by a 10%margin. However, the premium is not enough to justify trading from the security offered by gold. Therefore, investors are better off investing in physical gold in this case.
The craze for gold jewelery in India is never over. Jewelery remains the biggest driver of gold demand in India. It is therefore logical to see how India’s leading gold jewelery manufacturers compete with physical gold.
First we had Titan, the largest jewelry company in India. While the company manufactures a wide range of fashion accessories, its jewelry division accounts for more than 50% of its total revenue.
Titan’s share price has risen more than 1,000% over the past decade. Titan, of course, gave the gold a run for his money.
Here is some interesting data about Titan…
Even a small investment of Rs 1,000 a month in Titan stock, since 2002, will lead to tempting returns.
Look how the power of compounding has gone wild here …
Another well -known goldsmith in the listed arena is Tribhovandas Bhimji Zaveri (TBZ). It operates one of the largest jewelery retail chains in India. The company has 37 retail stores nationwide.
TBZ made its debut on the Indian stock exchange in 2011. Unlike Titan, TBZ’s performance was very disappointing. The company has a poor physical gold performance. In fact, the stock price has never touched its issue price since it was listed.
While Titan and TBZ are largely domestic players, there are other jewelry makers that are more focused on the international market.
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 lucky as one might think. Titan once exported gold products but had to stop its export share due to thin margins.
Rajesh Exports has resisted all odds with success in the export business. This is due to his different approach to business.
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. Outstanding performance is usually reflected in its share price.
Rajesh Exports’s share price has risen at a CAGR of 20.8% in the past decade compared to gold’s CAGR of 1.1%.
Physical Gold or Gold Company: Which Looks Better in the Long Run?
After considering the above, it is clear that in most cases, gold companies tend to outperform physical gold.
So gold companies seem to be the obvious choice, right?
However, to invest in a gold or gold company depends on your risk appetite.
Investing in a gold company requires high risk. So, if you prefer to take risks then you can put some of your capital in a quality gold company.
But be careful when investing in this company. You don’t want to get yourself into a company like TBZ where you could possibly lose money from your hard earned money.
We cannot emphasize enough fundamental importance when investing in equities. Analyze the fundamentals of the company carefully before putting any money into it.
If you are reluctant to take risks and want to play it safe, then investing in physical gold is the best option.
Since we’re talking about gold, don’t forget to check out Rahul Shah’s video of Co-Head of Equity where he spills over gold and discusses whether it really sweetens your equity portfolio in the long run.
You can watch the video here: Does Gold Make Your Portfolio Crash Proof?
Gold exchange traded funds (ETFs) are another alternative to physical gold.
To explain more on this topic, India’s #1 trader Vijay Bhambwani has recorded a video last year discussing whether to buy gold in physical form or in electronic form.
We highly recommend you watch the video to get a better idea of gold ETFs. Video link – Gold ETF or Gold Ingot?
Disclaimer: This article is for informational purposes only. It is not a stock proposal and should not be treated as such.
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