Gold returns outshine equities but investors flock to…

Data reveals that gold-obsessed India is not as gung-ho about investing in gold-backed digital products even when gold keeps surging to new highs time and time again, even beating equity on returns.

At the end of December 2019, the Nifty50 stood at 12,168, and average annual gold price in 2019 was ₹35,220. In December 2022, Nifty50 was at 18,105 and gold was ₹55,220. Nifty50 on December 14, 2023, was at 21,183, while gold was priced at ₹64,210.

Between the calendar year end of 2019 and 2022, Nifty50 returns were 49% while the return on gold was 57%. And between the end of December 2019 and December 14, 2023, Nifty50 returns are 74%, while the return on gold is 82%.

Global volatility fuelled by geo-politics, wars, and the trauma of the recent pandemic, has incited a renewed interest in gold amongst global investors. In India, at the end of December 2022, gold was priced at ₹55,220 per 10 grams and surged to ₹64,210 on December 14, 2023. So, in this calendar year, gold became costlier by ₹8,990, or up 16%.

Gold prices rose by 16% in this calendar year and during the same period Nifty surged by 17%, but the stock market appears more attractive as compared to gold-backed digital products, despite both being neck and neck in terms of surge in value. Not only that, stock market returns cannot be isolated from the inherent risk of high volatility, while gold is a much safer bet that does not require as much research before taking an investment call. And yet, as per the October 2023 data provided by the Association of Mutual Funds in India, the net AUM of gold ETFs in India is ₹26,162 crore, which is just 1.1% of the total equity AUM of ₹23.6 lakh crore.

At the same time, the net AUM of gold ETFs in India makes just 5.33% of the AUM of Passive equity investment through ETF schemes that stood at ₹4,90,849 crore at the end of October 2023.

Nifty50 vs. gold-backed digital products

The Indian stock market has added about 9 crore (or 90 million) more Demat accounts, from 4 crore (40 million) in FY20 to about 13 crore (130 million) till now. Meanwhile, the World Gold Council estimates that currently there are about 5-6 million active digital gold accounts in India. As per the Association of Mutual Funds in India, there are about 49 lakh (4.9 million) folios of gold ETF at the end of November 2023.

It seems even digitally savvy investors are not keen on digital gold or gold ETFs, though the entry barrier for getting into the stock market is almost the same as owning digital gold or investing in gold ETFs. And this is happening even though the returns from the stock market, compared to gold, have been lesser and riskier since 2020.

Why do Investors undervalue gold investments in digital formats?

As per the World Gold Council Report - Over the last few years gold investment products have seen their share of overall consumer demand fall, from 35% in 2013 to 22% in 2022. A brief recovery in 2020 (to 29%) appears to be a one-off, which owed more to the steep fall in jewellery sales – particularly wedding purchases – during the pandemic lockdown.

One of the prime reasons for digital gold formats, like digital gold and gold ETFs, not being as attractive as both gold (physical forms like bar, coins and jewellery) and equity investments, is psychological rather than logical. When an investor thinks of buying gold, the inclination is more towards buying gold as jewellery, bar, or coin, rather than its digital counterpart. As the notional quota of gold in the investment basket gets filled with physical gold the investor diversifies it with equities, fixed deposits, and other instruments of investment.

Another reason may be the lack of investor awareness regarding gold-backed digital products. The same asset management companies that operate in the Mutual Fund domain also offer gold ETF products, and advertising for the latter is almost negligible. The same goes for Sovereign Gold Bonds issued through banks and digital gold sold through about 16 Fintech platforms. Only a fraction of fintech platforms, like Paytm or Phonepe, that provide Unified Payment Interface (UPI) services, advertise their digital gold products to native users of the app. It seems that mostly those investors who are self-informed about digital format gold products buy them at their discretion.         

As compared to information about products and success stories from the equity market, information about gold-backed digital products is minuscule. The marketing might of asset management companies pushing their equity-related products, coupled with the marketing by companies launching IPOs, financial influencers peddling trading tips on social media, and media channels dedicated to the equity market make a heady concoction of the bias towards the equity market.

Hence it is highly possible that an investor’s decision to invest in equity products rather than gold-backed digital products is heavily influenced by the cognitive bias created by the incessant barrage of information she unconsciously receives about the equity market.

As the author of Thinking Fast and Slow, Daniel Kahneman, puts it, “A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”