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Gold Versus the Stock Market – Which Will Deliver the Biggest Returns?

More and more people are now looking at gold again, as the stock market shows signs of faltering after its recent rally of March to August 2009. The question is, will gold resume its upward trend if stocks decline again, or will it join other commodities in losing its value in the recession?

Traditionally the stock market has been the best vehicle for capital appreciation. Until the autumn of 2008 stocks had on average grown in value at a higher rate than anything else. The failure of the banking sector in Europe and the United States and the subsequent government bail-outs led to a crash in share prices, which in turn caused a surge in the price of gold to nearly $1,000 an ounce.

The subsequent stock market rally, starting in March 2009, led to the price of gold stalling and then declining towards $900. It can be seen from this that gold tends to do well when stocks are depressed and not so well when stock prices are rising.

On the other hand, gold is a commodity like any other commodity, and commodity prices, like most other prices, have tended to stay depressed since the start of the recession. So we have to consider whether gold can be differentiated from other commodities in the present situation.

The obvious difference between gold and other commodities is that gold is not just a commodity – it’s also a perceived store of value. Other precious metals like silver and platinum are also used as investment vehicles, but gold is the most popular, against which currencies are measured.

Currencies have in nearly every country declined steadily over the last hundred years or so. Inflation may not be the beast it was in the 1970s, but it’s still there, and it always has been since modern banking and finance evolved. Now we have a situation where both the US and the UK governments have borrowed billions to bail out the banks, and engaged in “quantitative easing”, i.e. money creation, in order to try and spend-borrow their way out of the recession.

What is this going to do to the price of gold? Gold is scarce, which is one of the reasons that it is perceived as valuable. Nearly all the gold currently mined goes into industrial uses and personal ornamentation. Very little is added to the coffers of national exchequers.

The price of gold therefore has to rise from its present level. Most other things will also rise in price over the forthcoming months and years as the increased money, with no increase in production to justify it, comes into circulation. With all the stock trading charts showing depressed prices, and inflation reborn, gold, the traditional refuge of capital in times of uncertainty, will most likely at least double in value over the next few years.

In summary, gold will almost certainly out-perform the indices of the world’s stock markets in the short to medium term future.

The Indian Stock Market

The working of stock exchanges in India started in 1875. BSE is the oldest stock market in India. The history of Indian stock trading starts with 318 persons taking membership in Native Share and Stock Brokers Association, which we now know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of India. National Stock Exchange comes second to BSE in terms of popularity. BSE and NSE represent themselves as synonyms of Indian stock market. The history of Indian stock market is almost the same as the history of BSE.

The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is compiled based on the performance of the stocks of 30 financially sound benchmark companies. In 1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 figures in 1992. The reason for such huge surge in the stock market was the liberal financial policies announced by the then financial minister Dr. Man Mohan Singh.

The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It came to public knowledge that Mr. Mehta, also known as the big-bull of Indian stock market diverted huge funds from banks through fraudulent means. He played with 270 million shares of about 90 companies. Millions of small-scale investors became victims to the fraud as the Sensex fell flat shedding 570 points.

To prevent such frauds, the Government formed The Securities and Exchange Board of India, through an Act in 1992. SEBI is the statutory body that controls and regulates the functioning of stock exchanges, brokers, sub-brokers, portfolio managers investment advisors etc. SEBI oblige several rigid measures to protect the interest of investors. Now with the inception of online trading and daily settlements the chances for a fraud is nil, says top officials of SEBI.

Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark was crossed in June and the 8000 mark on September 8 in 2005. Many foreign institutional investors (FII) are investing in Indian stock markets on a very large scale. The liberal economic policies pursued by successive Governments attracted foreign institutional investors to a large scale. Experts now believe the sensex can soar past 14000 mark before 2010.

The unpredictable behavior of the market gave it a tag – ‘a volatile market.’ The factors that affected the market in the past were good monsoon, Bharatiya Janatha Party’s rise to power etc. The result of a cricket match between India and Pakistan also affected the movements in Indian stock market. The National Democratic Alliance led by BJP, during 2004 public elections unsuccessfully tried to ride on the market sentiments to power. NDA was voted out of power and the sensex recorded the biggest fall in a day amidst fears that the Congress-Communist coalition would stall economic reforms. Later prime minister Man Mohan Singh’s assurance of ‘reforms with a human face’ cast off the fears and market reacted sharply to touch the highest ever mark of 8500.

India, after United States hosts the largest number of listed companies. Global investors now ardently seek India as their preferred location for investment. Once viewed with skepticism, stock market now appeals to middle class Indians also. Many Indians working in foreign countries now divert their savings to stocks. This recent phenomenon is the result of opening up of online trading and diminished interest rates from banks. The stockbrokers based in India are opening offices in different countries mainly to cater the needs of Non Resident Indians. The time factor also works for the NRIs. They can buy or sell stock online after returning from their work places.

The recent incidents that led to growing interest among Indian middle class are the initial public offers announced by Tata Consultancy Services, Maruti Udyog Limited, ONGC and big names like that. Good monsoons always raise the market sentiments. A good monsoon means improved agricultural produce and more spending capacity among rural folk.

The bullish run of the stock market can be associated with a steady growth of around 6% in GDP, the growth of Indian companies to MNCs, large potential of growth in the fields of telecommunication, mass media, education, tourism and IT sectors backed by economic reforms ensure that Indian stock market continues its bull run.