Is Gold a good investment?
Gold is considered as a valuable commodity. Many countries including China, have a large gold reserve to counter dollar impact on their local currency. Many investors own gold to provide a hedge against inflation.
We keep hearing questions from people about whether to buy gold or not? When is it the right time to invest? Is it lucrative?
First, let’s understand what are the various forms of GOLD.
Jewellery – People in India love to buy gold ornaments. There are certain concerns about its safety, high costs and outdated designs while holding it in the form of a jeweller.
In the form of jewellery, you pay making charges, often higher than 10% of the value of gold. These making charges are not recoverable. If you were to sell the same jewellery the next day, you lose 10%, assuming gold prices don’t move.
Gold Coin Scheme – Gold coins are available for sale by jewellers, banks, NBFCs etc. Now even e-Commerce websites have started selling gold coins online. The government has launched minted coins which will have the National Emblem of Ashoka Chakra engraved on one side and Mahatma Gandhi on the other. The coins are available in denominations of 5 and 10 grams while the bars are for 20 grams. All the coins are bars are hallmarked as per BIS standards.
Gold Savings Schemes – This is where a person deposits a fixed amount every month for a fixed tenure. When the term ends you can buy gold from the same jeweller at a value equal to the total money deposited plus the bonus amount contributed by the jeweller. Recently, jewellers have run away with investor’s money and investors were seen running from pillar to pole but still with no legal solution.
Gold Exchange Traded Funds – Owning gold ETF is one of the most cost-effective ways to invest in gold. There are no initial buying and selling charges that go into buying jewellery, bars & coins.
You need to have a trading account with a stockbroker and demat account. There are no entry or exit charges, but you do pay the broker and ETF related charges.
Sovereign Gold Bonds (SGB) – The government open a window to sell SGB to investors. This happens on a regular basis and the window remains open for about a week. The government pays you 2.5% p.a. as interest irrespective of the movement of gold prices.
Digital Gold – Investor can purchase gold coins, bars and jewellery online, on platforms like PayTm, a mobile wallet app.
Out of all the options available, Sovereign Gold Bonds (SGB) seems to be a reasonable option that is backed by the government and also earns you 2.5% annually. However, SGB is for a term of 5 years or 10 years. The next best option to invest in Gold is Gold ETF.
Is gold a good investment?
Now that we know our options, if we were to invest in SGB or ETF, is that even a good idea.
Gold provides a strong shield against inflation. The gold prices remain almost unaffected at the time of inflation and investors do not have to suffer huge losses.
Unlike, other forms of physical assets such as real estate, gold can be converted easily into cash in any part of the world. There are always buyers who are ready to buy gold.
It is known that adding different asset classes to your portfolio can diversify and lower the overall risk of your investment. Moreover, it is seen that gold often moves inversely in relation to the stock market and currency values.
However, a physical form of gold is not recommended. Physical gold has to be kept safely and would often cost in the form of storage cost such as a bank’s locker charges. Additionally, physical gold does not provide any regular income.
Gold investment should be linked with a financial objective. For example, the marriage of kid may need gold in a couple of years. In order to lock in the rate, it may make sense to invest in ETFs or SGB. You may even spread the investment in form of monthly SIPs in a Gold fund.
Gold is often considered a good investment when all others fail. It is very tempting to buy gold in a struggling economy; investor should try not to get carried away. An investor can add gold to their portfolio when a financial goal (say marriage in family) requires gold.