Saturday, June 21, 2014

Comparing the Straits Times Index (STI) vs Gold

Since I was wondering what the relationship between Gold and other asset prices were, I thought I would first look at home and compare the performance of the STI to the performance of Gold.

The STI was created way back in 1987, however the first proper investment vehicle to invest in it was the SPDR STI ETF that was launched in 2002. Therefore, I went back to look for the values of the Gold priced in SGD and set out to compare it to the SPDR STI ETF as a proxy.

Below is an interactive graph of the price of Gold in SGD terms.

Below is an interactive graph of the STI itself in SGD.

So, what is their performance?

In April 2002, Gold priced in SGD was $558.02. As of May 2014, it was $1619.52. This was a 190.22% increase. $10,000 invested in gold then would be worth $29,022 today.

In April 2002, the STI was 1725.37. As of May 2014, it was 3295.85. This was a 91% increase. $10,000 invested in the STI then would be worth $19,102 today.

But of course, the picture is not complete because I did not add the dividends that would have been collected and reinvested back! Checking the SPDR website again and here we go...

Not bad eh, pretty accurate calculations. Just looking at the index increase since 2002, it is roughly 90% capital gains. Reinvesting dividends paid over that entire period would give you 170%.

So, 190% from investing in Gold and 170% from investing in the STI. it seems like quite a close call doesn't it?

How about we try a ratio of the two? Then we can see their relative values to each other.

The ratio is quite telling. We are between the standard deviation, which I would propose is a fair value of Gold and the stock market.

The Singapore stock market have gone almost no where in the past 3 years themselves, which is why they are not over-valued. Therefore even though Gold has been relatively beaten down so badly over the past 3 years, it does not signal that Gold is cheap to equities.

HOWEVER, another scenario that may be possible is that the ratio is in a major downwards sloping channel. That would be supportive the Gold prices head back towards a lower ratio. The only way to tell I guess is to look at a much longer term chart.

In Feb 1988, Gold priced in SGD was $892.94. As of May 2014, it was $1619.52. This was a 81.4% increase.

In Feb 1988, the STI was 888.8. As of May 2014, it was 3295.85. This was a 270% increase. Note that dividends were NOT included, so a rough guess could be anywhere north of 350% if dividends were reinvested.

Looking at the grand scheme of things, gold does look overvalued compared to the Singapore stock market now. Perhaps the reason for outperformance during 2002 was due to the fact that gold started off from a relatively undervalued position.

The ratio seems quite important. If you are buying beyond the standard deviations, you will be getting relative under or out performance based on which side of the ratio you bought on.

I have to admit that I am slightly a bit disappointed that the result of this study does not show gold as being relatively undervalued now. This study has opened my eyes a bit to be more accepting of the relative value of Singaporean equities.

1 comment:

Observe the house rules.