International Journal of Business

Management & Research (IJBMR)

ISSN 2249-6920
Vol. 3, Issue 2, Jun 2013, 103-110
© TJPRC Pvt. Ltd.

GOLD VS STOCK MARKET: A COMPARATIVE STUDY OF RISK AND RETURN

BARINDER SINGH1 & J. B. NADDA2

1
Assistant Professor, Shoolini University of Biotechnology and Management Sciences, Solan, Himachal Pradesh, India
2
Professor, Himachal Pradesh University, Sammar Hills, Shimla, Himachal Pradesh, India

ABSTRACT

An investor has various investment options to invest his money and this all depend on his risk profile and
expectation of returns. Different investment options represent a different risk-reward trade off. Out of different types of
investment options Gold, Stock Market, Mutual fund and Fixed deposits in the Banks are available in the Market.
Traditionally people in India Invest in the Gold in the form of Jewellery at the time of marriages and keep this gold for a
very long period but at the same time investment in the stock market is very limited because of its risky nature and
possibility of loss of value. Though recently people in India has started investing in stock market also but investment in
Gold is still preferred over investment in stock market .People perceive it more safe and ever-growing investment as
compare to investment in the stock market. In India the most popular Stock Exchange is National Stock Exchange and the
maximum volume of stock trading is with this stock exchange.

The focus of present study is on the returns of the Index of National Stock Exchange(NSE) and its comparison
with the returns of Gold for the same period and further comparison of risk for both the investments i.e. NSE Index and
Gold is done to find out which is more risky.

KEYWORDS: CAGR, Gold ETF, NIFTY, Risk, Return

INTRODUCTION

Every Individual wants to make more money with the help of money he already has. The process of making
money out of money is known as Investment. Investment is the commitment of funds in an asset or financial instruments
with the aim of generating future returns in the form of interest, dividend or appreciation in the value of the instrument.
Investment is involved in many areas of the economy, such as, business management and finance no matter from
households, firms, or Governments. Usually Investment is confused with the commitment of funds for gains only hence
risk and duration of investment is ignored. Funds used for gambling, speculation also are committed for gains but these
cannot be termed as an Investment. Investment is a process where an individual carefully analyze the various investment
instruments available in the market defines his risk profile and then matching these two take the decision to put his money
for a longer period to earn returns.

An investor has different investment options to choose from, depending on his risk profile and expectation of
returns. Different investment options represent a different risk-reward trade off. Low risk investments are those that offer
assured, but lower returns, while high risk investments provide the potential to earn greater returns. Hence, an investor’s
risk tolerance plays a key role in choosing the most suitable investment. Various investment options available are Bank
Deposits, Commodities like Gold, Silver etc., Post Office Savings Schemes, Public Provident Fund, Company Fixed
Deposits and Stock Market options like Bonds and Debentures, Mutual Funds, Equity Shares etc., Of the various types of
investment options in the Stock Market, Gold Exchange Traded Funds (Gold ETFs) happens to be one of the best options
to be included in the portfolio for diversification of risk.
104 Barinder Singh & J. B. Nadda

People can invest in the stock market directly through stock brokers by buying and selling the shares of different
companies or they can route their investment through equity mutual funds where mutual fund company collect the money
from individuals and issue mutual fund units to these investor further the collected money is invested in the stock market
by the experts hired by the mutual fund company. In the same way there are different ways to invest in the Gold investor
can buy gold from local jeweller, gold coins form bank, gold mutual fund or Exchange Traded Funds etc. Gold is always
consider as one of the safest investment in India and moreover people prefer to invest in Gold as compare to the Stock
Market. Stock Market Investments are considered riskier one but it is also said higher the risk higher the return. According
to the saying 'higher the risk higher the returns' so for the stock market returns should be higher than the returns from Gold
Investments. People invest their money according to their risk profile and expectation of the returns and it is the human
nature that everybody wants higher returns at a lowest possible risk.

REVIEW OF LITERATURE

The different studies shows that in India and globally people prefer invest money in the yellow metal i.e. Gold
because of its high returns in the recent past. The prices of yellow metals have risen fairly high and have yielded better
returns than any other instruments over the last few years. Analysts say that the position for gold is still attractive in the
medium term due to uncertainty in the global economies, and uncertain price changes in the global market. Investors can
include precious metals to their portfolios carefully by buying in small quantities from time to time. (World Gold Council)
High liquidity and flexible monetary policies of central banks across the world, to boost economic activity, further resulted
in more investments in Gold, leading to higher prices of gold.

The long-term benefit of Gold is its ability to stabilize a portfolio and protect it against market fluctuations.
Historically, gold prices have shown better stability even during periods of crisis, as compared to other investment
avenues. Most experts advise investing in gold as a "must", since gold creates a robust portfolio that withstands market
fluctuations. India’s domestic production of gold is very limited; the rising demand has to be sourced from outside the
country. Moreover, Gold as a commodity on its own does not add much to the productive capacity of the economy as when
one buys gold, it either is stored in lockers or gets converted into jewellery. In both the cases, money spent on purchasing
gold gets blocked. (Assocham, 2011)

As per a consumer demand report (World Gold Council) the consumer demand figures in selected countries
suggests:

India accounts for nearly one-third of the total world demand for gold i.e. 1059 tonnes. Indian consumer demand
for gold is 37.6 per cent more than that of China (769.7 tonnes). Another major economy of the world USA reported at
213.5 tonnes. Moreover if we look at the demand for gold alongside the size of these major economies we see that:

India’s GDP is no where closer to that of China and USA. In terms of percentage share India’s GDP is 27.7
percent of China and a meager 11.0 percent of USA. (UNCTAD, RBI) Thus looking at the pattern of gold consumption in
India it seems that creating awareness about the different gold investment avenues and trading in such avenues can help in
bringing down the demand of physical gold.

In his article Bakul Chugani Tongia pointed out that, in the month of May 2010 alone, Gold ETFs have clocked in
about 8.7% gains, strengthening its role as a hedge against inflation as well as equity markets as Sensex has declined by
about -5.6% during the same period. He also pointed out that, since the launch of gold ETFs in early 2007, they have
emerged as a strong asset class, generating more than 27% returns (CAGR) in the past three years against the Sensex
returns of just about 4% CAGR during this period.
Gold Vs Stock Market: A Comparative Study of Risk and Return 105

Fisher lists five reasons why the Gold remains the most universally accepted and time-tested asset class. The
reasons are Effective Portfolio Diversifier, Thrives under worst conditions, Hedge against inflation, Linkage with oil and
US Dollar and Widening demand and supply Gap. He suggested that gold must be made a part of the asset allocation
because it is a great risk diversifier and considered as a safe haven during times of economic uncertainty, political strife,
high inflation and wars. Fisher in his article mentioned that Gold Exchange-Traded Funds (ETFs) have made investing in
the yellow metal very convenient and inexpensive. He expressed that they offer a way of participating in the gold bullion
market without the necessity of physical delivery of gold. He listed out six reasons why gold ETFs are considered as the
best way to invest in the gold. The reasons mentioned are Wealth tax exemption, Income tax benefit, Investment in small
denominations, Hedging, Convenience and better holding of ETFs as compared to physical gold holdings.

Dr. Prashanta Athma and Ms Suchitrak pointed out in their article that Gold ETF is an emerging option of the
various investment alternatives available to the investor. The low volatility of gold prices as compared to equity market,
weakening of Indian Rupee against US Dollar and growing uncertainty about global economy resulted in the emergence of
Gold ETF as a strong asset class. Allocation of a small portion of investment in Gold ETF would diversify the portfolio
risk. Inclusion of any Gold ETF in the portfolio of assets would diversify the risk. Gold ETFs also offer the benefit of
lower incidence of tax. Inspite of the merits of holding Gold ETFs, the investment in the same is low due to the low
awareness among the investors and the sentimental attachment of the investors towards holding gold in the physical form.

OBJECTIVES OF THE STUDY

The objectives of the study are to:

 To Compare the returns of Gold and Stock Market Index.

 To measure the risk involved in Investment in Stock Market and Gold

 To find out the best Investment Instrument among Stock market and Gold on Risk Return basis.

Methodology: The period of study is Eight Years starting from 2005-2006 to 2012-13. The data for this period is collected
from the official website of National Stock Exchange for the Index Value and the data for the spot prices of Gold traded is
collected from the official website of Multi Commodity Exchange for the same period.

Tools: The different Statistical tools used in the present study are Standard Deviation it is a measure of volatility and
Compounded Annual Growth Rate, it tells about the annual growth in the initial investment over a period of time
Percentage is used to calculate annual percentage returns of the given data.

DATA ANALYSIS AND INTERPRETATION

Table 1: Annual Closing Value of Index (Nifty) and Returns Calculations

Annual %Age
Date Close
Returns Returns
4/1/2005 2067.65 - -
4/3/2006 3473.30 1405.65 67.98
4/2/2007 3633.60 160.30 4.62
4/1/2008 4739.55 1105.95 30.44
4/1/2009 3060.35 -1679.20 -35.43
4/1/2010 5290.50 2230.15 72.87
4/1/2011 5826.05 535.55 10.12
4/2/2012 5317.90 -508.15 -8.72
4/1/2013 5682.55 364.65 6.86
Source: Compiled from NSE Website nseindia.com
106 Barinder Singh & J. B. Nadda

Source: Calculated in the Table 1

Figure 1: Nifty Annual Returns Chart

Table 1 Shows that over a period of eight years the value of index has grown up from 2067 to 5682 it means those
who invested in the index eight years back got positive returns from their investment in eight years period. Figure 1, also
shows during this period index has delivered negative returns in the year 2008-09 and 2011-2012 -35.43% and -8.72%
respectively, this was the period of global recession and slowdown which affected the Indian stock markets also. Though
money has grown up over a period of time but stock markets negative returns fear the people and also shows that there is
risk in this market.

Table 2: Annual Closing Price of Gold and Returns Calculations

Spot Annual %Age

Date
Price(Rs.) Return Returns
Jun 6 2005 6075
Apr 1 2006 8480 2405 39.59
Apr 2 2007 9357 877 10.34
Apr 1 2008 11831 2474 26.44
Apr 1 2009 15114 3283 27.75
Apr 1 2010 16320 1206 7.98
Apr 1 2011 20704 4384 26.86
Apr 2 2012 28000 7296 35.24
Apr 1 2013 29526 1526 5.45
Source: Data Compiled from mcxindia.com

Source: Calculated in Table 2

Figure 2: Annual Returns from Gold
Gold Vs Stock Market: A Comparative Study of Risk and Return 107

Table 2 shows the Closing price of Gold from 2005 to 2013 also annual returns in absolute value and in %age.
Figure 2, Show that as compare to returns from NSE Index i.e. Nifty the returns of Gold are never in negative in these eight
years though there is variance in returns and these went down to even 7.98% and 5.45 % in the years 2009-2010 and 2013.
The returns of Gold shows that Investment at any point of time in Gold will yield some positive returns for investor so it
doesn't seem to be risky invest in Gold.

Source: Data Compiled from Website of NSE

Figure 3: Monthly Closing Value of Index (NIFTY)
The above Graph shows the value of Nifty Index during the period from 2005 to 2013. It shows that how value of
the Index moved during this period and finally in the end of the period it has gained the value. But if we magnify it and try
to understand the graph we can see the variations in the value of index which are very high. As we know that nobody can
time the market so it is very difficult to know the right period to invest in the market. Graph shows that if one has invested
in the year 2005 he can takeout handsome returns at the end of investment period but if the same person invested in the end
of 2007 or starting of 2008 he still stands at the same level and earned nothing even after being invested 5years in the
market. The returns from stock market are not smooth and also they are very risky due to their volatile nature and one must
have very good knowledge of market to invest in it. So lot of hard work is required to invest in stock market to earn higher
returns. From an Individuals point of view one who is not well versed with the tools of investment and don't have technical
knowledge of Investment, understanding of chart patterns etc. it becomes very difficult for him to invest directly in the
market. They can invest in the Mutual Funds but returns of mutual funds are again not as high as we can see in the case of
Gold but risk is surely lower than the stock market.

Source: Data compiled from the website of Multi Commodity Exchange

Figure 4: Monthly Closing Value Graph of Gold Prices
108 Barinder Singh & J. B. Nadda

The above Graph shows the Spot Price data of Gold during the period from 2005 to 2013. It shows that how Price
of the Gold moved during this period and finally in the end of the period it has gained lot of value. As discussed above
nobody can time the market so it is very difficult to know the right period to invest in the market. Unlike Stock Market
index graph we can see very little variations in the Price of Gold which is good for an investor to invest without an fear.
Graph shows that if one has invested in the year 2005 he can takeout handsome returns at the end of investment period and
also if the same person invested later in any year he still can earn good returns in Gold.

The returns from stock market are not smooth and also they are risky due to their volatile nature also one must
have very good knowledge of market to invest in it. So lot of hard work is required to invest in stock market to earn higher
returns. But in Case of Investment in Gold it is not so risky and also do not require much expertise to study the market.
Also the returns of Gold are very smooth.

MEASURE OF RISK AND RETURN

The true measure of risk and return are variance or Standard Deviation (σ) and Compounded Annual Growth Rate
(CAGR). Standard deviation tells us about the volatility of the data (i.e. returns in present study) and CAGR tells about the
compounded annual growth of the investment. Here in this study standard deviation and CAGR for both i.e. Index and
Gold investments have been calculated and the results are shown hereunder:

Table 3: Calculation of Standard Deviation and CAGR of Returns of Index and Gold

Standard Returns
Deviation (CAGR)
Nifty 37.02 13.47
Gold 11.80 21.85
Source: Calculated from the data collected from NSE and MCX websites

The above results shows the standard deviation of the returns of both Index (NIFTY) and Gold which tells us
about the risk involved in the investment. The standard deviation of NIFTY calculated over last eight years returns is 37.02
and for the same period of Gold it is 11.80, it means the volatility of Index return is higher as compare to volatility of Gold
returns. Higher volatility of Index means that there is high risk involved in the investment of stock market on the other
hand risk of investing in the Gold is not so high and it is less 1/3rd of the risk of Investment in the index.

If we compare the CAGR of both the investments we can clearly see from the Table 3 that returns from
Index(NIFTY) are 13.47% per annum and from Gold for the same period returns stand 21.85% per annum. Returns from
Gold are much higher than the returns form Index of stock market over a period of last eight years. While risk involved in
the stock market is higher than the risk involved in the investment in Gold so the returns from the stock market also should
be higher from the returns of Gold but present study shows that Gold in India is such an asset which delivers higher returns
then stock market with lower risk involved in it.

CONCLUSIONS

Investment in Gold in is very popular in India and as compare to Stock Market the returns of Gold are much
higher over the last eight years. People's preference of Investment in Gold yield them fruitful result in term of positive
returns over a long period. On the other hand risk involved in the Gold is less than 1/3rd of the risk involved in the
investment in Stock Market as shown in the study. Further to invest in the Gold investors need not to time the market
understand the complex business environment and know about the various investment tools which are otherwise required
in case if he invest in the stock market. the only thing an Investor need to take care of is that rather than buying jewellery
Gold Vs Stock Market: A Comparative Study of Risk and Return 109

one can go for buying Gold Mutual Fund of Exchange Traded Fund the returns of ETF are directly correlated with the
returns of Gold returns

REFERENCES

1. Bakul Chugani Tongia., 2010 , “Gold ETFs: Craze for safety adds to popularity”, [online] Available at
http://economictimes.indiatimes.com/markets/bullion/Gold-ETFs-Craze-for-safety-adds-to-
popularity/articleshow/6005498.cms

2. Dr. Prashanta Athama, Ms Suchitrak, 2011,Gold ETFS: An emerging Investment Options, Asia Pacific Journal of
Research in Business Management

3. Dipak Mondal, 2010, “Despite rising prices, gold ETFs look strong”, [online] Available at

http://www.mydigitalfc.com/news-analysis/despite-rising-prices-gold-etfs-look-strong-755

4. Fisher, “Gold As An Alternative Asset Class: 5 Reasons to Invest”, [online] Available at

http://www.themoneyquest.com/2008/11/gold-as-alternative-asset-class-5.html

5. Fisher, “Gold ETFs: The Best Way to Invest in Gold”, [online] Available at

http://www.themoneyquest.com/2008/11/gold-etfs-best-way-to-invest-in-gold.html

6. www.gold.org

7. www.mcxinda.com

8. www.nseindia.com