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Tuesday, March 31, 2015

Equity vs Gold

The table below summarises the returns of Gold and of S&P BSE SENSEX ('Sensex') since 1979, when the Sensex commenced with a base value of 100.

Past performance may or may not be sustained in the future

As can be seen, long term returns on equities are much higher than returns on gold.

Einstein said "Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn't ... pays it". This has been experienced here. At 17.1% CAGR, Rs 10,000 has become ~290 times in 36 years, while in gold at 10.4% CAGR, it has become ~35 times.

A difference of ~7% in returns over longer term (36 years) has resulted in 8x increase in wealth.

The average inflation over this period has been ~8% (CPI). Thus, gold has given returns that are close to inflation, thereby merely preserving the purchasing power. On the other hand, Sensex has delivered nearly 9% p.a. excess return over inflation. Over long periods this has made a big difference.

The reason for this is simple. Equities over time grow in line with the growth of underlying businesses. As businesses comprise the economy, the nominal growth of the economy (real growth plus inflation) is a good proxy for the average growth in businesses.
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