Gold is called safe investment heaven for investors. It has been observed that that there us a negative relationship between gold and stock market performance. When the market is most pessimistic, gold performs very well. When stock market is slipping down investors seem to shower their confidence in gold. History has proved that the gold demand increases when we see countries finance minister frowning. I have personally seen that when news channels are flashing slower GDP rates, on other side the sale of gold coins, gold bars and even exchange traded funds goes on rampage.
This is a true case study on investment-cycle of an investor who was then investing both in gold and stocks. This article will explain my readers how diversification of investment between stocks and gold proves to be an instant hit in moments of crisis.
Hypothetical Case Study to Learn Relationship Between Gold and Stock Market
The case study is based on an investor who was born in the year 1980. The boy became as investor the day his parents decided to buy a Nifty stock for him on his 21st birthday. It was August 21 of the year 2001 and Nifty was hovering around 1000 points. His parents decided to venture into stocks investment and they decided to buy stocks worth $300. But the mother was a more defensive investor and she decided to gift her boy another $300 worth of gold coins (approx one ounce).
By Aug’2005 the Nifty nearly doubled its points to 2400 levels (2.4 times of 2001). Simultaneously the value of gold also jumped in value form $300 to $450 in 2005 (1.5 times of 2001). But that was only the end of the plateau performance of Nifty, by the year 2008 the Nifty nearly jumped six (6) times. Similarly the stocks which were bought in the year 2001 jumped to nearly 12 times levels.
In those years of year 2008 the boy got married and he started his family. Not only he was trying to manage his married life full of responsibilities and expectations but he was also getting an uneasy feeling about movements in Nifty. Nifty was going-up too steeply. It did not take his fear to become reality in Jan’2008 when the stock market crashed. But he did not ignored his uneasiness, just before the market crash he sold his stock holdings and bagged $3600 in 2008 (12 times of 2001). He immediately bought gold coins with the same $3600. At that time the gold was trading around $800 per ounce. Now he had 4.5ounce ($3600/800) plus 1ounce (5.5 ounce) of gold as his investment reserve. It took a year for Nifty to touch its bottom. In Jan’2009 the Nifty marked 2700 levels. Just at this point the investor sold his 5.5 ounce of gold which was trading then at the rate $900 per ounce ($4950). In Jan 2009 he invested these dollars $4950 to buy stocks which was the most undervalued point in recent history.
Now in the year 2010 the Nifty has jumped back to 6000 levels and the undervalued share that the investor purchased jumped nearly 6 times (500%) since then. His investment of $4960 was not worth $29700.
Imagine the kind of money this investor has made since year 2001. His parents invested $600 then which is now worth $29700 (49.5 times). In terms if annual rate of return it means a return of 47.73% per annum. Careful diversification of investment portfolio between stocks and gold is a good option. As there is a negative relationship between gold and stock market then inclusion of these two in portfolio creates a perfect balance.