In recent months, the interest in gold has grown palpably among investors across the world. Among the key reasons contributing to this sudden interest in gold is the fact that other asset classes, like stocks and bonds, seem very risky today. So, in a sense, there is a flight to safety as one would expect. And the fact that gold, relative to such assets, has been a very poor performer over three decades has only made it appear more attractive. But has gold delivered as much as it seems?

Take a look at the graph below (Data source: World Gold Council):

The graph shows how gold has returned, in different currencies, since the start of 2007. It is apparent from this self-explanatory graph that if you were invested in gold, in US$ terms, your investment would have been by far the best performer. But if you were invested in Indian Rupees (which you are), you did not fare all that well. But if gold is a standard commodity, why is the return different in terms of different currencies?

The answer lies in the exchange rate. In recent months, the India Rupee has appreciated significantly against the US Dollar. As a result, the gains made by gold in the international markets have not entirely passed through to you. And if the general expectation that the Rupee will appreciate further were to turn out to be true, then you can expect this disparity to continue to exist.

How has Gold performed vis-�-vis the BSE Sensex? Click here to know

But gold has worked for you

Even though you may feel disappointed in terms of the disparity in the year-to-date returns, gold has been a reasonably good investment for you (i.e. the investor invested in Indian Rupees) over the last few decades. And that's not because gold has been a fundamentally strong asset. But because over most of the last three decades, the Indian Rupee actually lost value vis-�-vis the US Dollar. Yes, exactly the opposite of what you have witnessed this year.

The result was that even though the price of gold in US Dollar terms declined over most of this period, you, an Indian investor, actually gained because the depreciation in the value of the Indian Rupee vis-�-vis the Dollar, more than made up for it! If this sounds technical, simply look at the graph below --

 

Now you know why you are taught that gold is a great investment! However, if you believe that we are entering an era of a stronger Indian Rupee, then you should know that it is the fundamentals of gold which will drive the future price of gold; not any other factor as in the past.

Buying Gold from your bank? Beware! Read more

By Personalfn.com, a financial planning initiative
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