During the corona virus pandemic, gold prices had soared to more than Rs. 5,900 per gram. However, after vaccine for the virus was launched, gold prices have quickly slid down and are now near Rs. 4,871 per gram. Even though gold prices have fallen, gold is regarded as a safe investment by investors, especially in India. India is a gold loving nation and the precious metal is used for consumption as well as investment. Here are the reasons why gold is a sought-after investment.
Inflation hedge
Usually, gold is considered as a hedge against inflation. What does this mean? Typically, gold prices rise when inflation goes up and gold prices fall when inflation falls. According to a study by the World Gold Council, the demand for Indian gold increases by 2.6% when there is a one per cent increase in inflation. Gold as an asset is able to significantly beat inflation over the long term. That is why it is considered a hedge against inflation.
Diversification of portfolio
Gold has a negative correlation with stocks and fixed-income securities such as bonds. This means that when these investments go down, gold prices will go up and vice versa. So, you can use gold to diversify your portfolio. However, you shouldn’t use this relationship to time your investment in gold. There are periods where gold has fallen along with stocks and bonds. So, nothing is guaranteed. Don’t invest in gold just because the markets are down. It is best to invest in gold when gold prices have fallen.
How to invest in gold
Physical gold
You can purchase physical gold from jewellers, banks, designated post offices or using a commodity exchange such as the multi-commodity exchange (MCX). While this can be used for consumption, using it as investment is disadvantageous. Why? This is because it entails high costs that includes making charges (if you are buying jewellery) and storage costs. When you buy gold jewellery, you need to pay for wastage and making charges, which reduces the value of your gold considerably. The resale value of such gold will also be low.
There are also frauds related to buying jewellery. Not all jewellers sell genuine gold jewellery and buying gold that isn’t pure could result in lower sale costs for the jewellery. Most jewellers don’t buy back jewellery for money. You can only give your old jewellery and get new jewellery. So, liquidity for gold jewellery is very low.
Gold ETFs
You can also invest in gold using Gold Exchange Traded Funds (ETFs). Gold ETFs invest in physical gold and are listed on the stock exchanges. Each unit of a Gold ETF represents 1/2 gram or 1 gram of 24 karat physical gold.
Gold ETFs are traded on the stock exchanges at the prevailing market price of physical gold. So, gold ETFs provide ample liquidity and can be sold in the stock markets. Gold ETFs investors do not need to pay making charges or any premium for investing. Also, investors don’t need to worry about purity of the gold, storage of gold and insurance of gold stored. Investors can use their demat account to invest in gold ETFs.
Sovereign Gold Bonds
SGBs are government securities that are denominated in grams of gold. These are bonds that are issued by the Reserve Bank of India (RBI) on behalf of the government. These bonds are issued in denominations of one gram of gold and an individual can invest up to 4 kilos of gold using SGBs in a financial year. You can also get interest on these bonds. The interest is fixed at the rate of 2.50 % per year. This interest is payable semi-annually. SGBs will provide investors with the market price of gold at the time of selling.
Note that these bonds come with a tenor of 8 years. You can redeem these bonds prematurely only after the fifth year from the date of issue. SGBs are tradable on the stock exchanges, if you have held them in your demat account.
How are Gold ETFs and SGBs taxed?
The capital gains that you make on gold ETFs will be taxed at 20% plus indexation benefits if you hold them for over three years. Note that the interest you earn on the SGBs will be taxable. The capital gains you receive on redemption of SGBs has been exempted from taxes. If you sell the bonds before maturity, the indexation benefits will be provided to the long-term capital gains after selling the SGBs.
SIP in gold
The best way to go about investing in gold is through a Systematic Investment Plan (SIP) like you do for mutual funds. Why? This is because it has several advantages. No one can predict gold prices. Even so-called experts haven’t accurately predicted gold prices. So, if you invest in gold every month, the cost of purchasing gold gets averaged out in the long run. Note that gold prices increase in line with the standard of living. So, buying gold regularly will help you acquire higher amounts of the precious metal at lower costs. Another strategy is to invest more in gold whenever prices fall. When prices correct significantly, you can consider stepping up your monthly investment.
If you are investing in gold, make sure that your gold investments do not exceed 10% of your investment portfolio. Why? This is because historical data suggests that equities have given higher returns than gold in the long run.
