Gold: Not A Gold Standard Of Investment

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2017 was one of the most rewarding years in the history of stock investment. Nifty and Sensex gave 31% & 29% returns respectively. Nifty midcaps were way ahead as they steadily outperformed all the benchmark indices giving sterling returns. All the investors, in 2017, were singing praises of equity and equity-linked investment mediums. When the market is clocking new highs week after week, it is very easy to lose sight of the fact that stock market is capable of steep falls as it is capable of unprecedented highs. Come February 2018, all those who were high on the market's glory run were highly critical of the way the market crumbled post union budget 2018.

Such distressed investors sometimes get so disillusioned about the stock investment that they start looking for other asset classes which will not give them "jolts" like the one equity gave.

In a way, it is a good idea to diversify your portfolio in various asset classes. The objective of doing so is to manage risk, that is if one asset underperforms other will average it out with better performance. Essentially, investors look at debt (Bond market) as a backup for equity. But the post-budget 2018 fall has scared stock investors so much that they are considering traditional investment mediums like gold and real estate for investment.

Is that a good idea? Let's find out.

Gold: The Yellow Metal That Indians Love

It's a fact - Indians love gold. From checking gold rates of the day to actually owning gold, Indians are obsessed with gold. For generations, we have heard and seen how people gape at gold and hold it in high regard. The reason for this extreme affection towards gold is its simplicity. You buy gold - you keep it in a safe for years - you either sell it at a higher price or give it your kids. It's a prized possession thanks to its high exchange value.

That's all there is to gold. But the complications arise when we start looking at gold as an investment medium.

Gold As Investment

Before we analyse gold and its investment potential, let's first define investment. Investment is an act of putting your money in medium/instruments which will keep the value of your invested money (capital) close to or at par with the inflation. For example, if I have Rs.100 and buy 4 shares of AXZ Company. 10 years later the share price of ABZ company is Rs.1,000. That means my Rs.100 are now worth Rs.4,000. In this way, my money grew with time.

Coming back to gold, you have to ask - can gold grow with time? It certainly can. The historical data suggests that it has grown steadily over last several decades. But the important part is what factors are responsible for the price movement of the gold. It has been observed that the price of gold spikes when there is extreme fear in the market or there is a prolonged geopolitical distress. In such scenarios, investors lose faith in all other investment classes and they tend to turn to gold as they feel its value wouldn't fall beyond a point. In a way, this belief is justified. Which means gold is the perfect tool for hedging but not for investment.

Why Is Gold Not Good For Investment?

Gold is just a commodity, it is not a business nor is it a legal tender. It's just a commodity, a precious commodity for that matter. If you look at other investment mediums like stocks, bonds or even real estate, there is a fundamental mechanism in all these investment instruments which is responsible for their price movement. For example, when you invest in a stock, it goes to the underlying company and the working efficiency of that company determines its value and eventually the value of your investment. In terms of gold, the belief that someone will give it a higher price is the only way through which it derives its value. Gold is unproductive. It doesn't contribute to the economic growth. A gold coin will remain a gold coin forever. Before you invest in gold check for other alternatives. If you deploy the same amount in other investment options like a mutual fund or direct equity, there are chances that those options would fare better than gold. As discussed above, the driving force of gold is the fear that other asset classes i.e. equity, bond, etc. will lose their value in future.

Price of Gold for last 10 years


Year Gold Price Year Gold Price
2008 Rs. 12,500.00 2013 Rs. 29,600.00
2009 Rs. 14,500.00 2014 Rs.28,006.50
2010 Rs. 18,500.00 2015 Rs.26,343.50
2011 Rs. 26,400.00 2016 Rs.28,623.50
2012 Rs. 31,050.00 2017 Rs.29,667.50

The above table perfectly illustrates the global theory that whenever there is fear in the global markets the prices of the gold spike. The most notable is the time frame from 2008 to 2011 when the businesses across the world were trying to recover from the impact of the recession. In this period, the gold price enjoyed a great run, the prices moved from Rs.12,000 to 26,000 in just 4 years. Similarly, 2014 onwards, when India and the global markets had completely recovered from the beating of recession and in India, a bull run had started, the prices of gold became stagnant. The prices were range-bound between Rs.29,600-26,343 for 5 years. This clearly reflects how gold and other businesses have a reaction on each other.

Nobody Should Invest In Gold?

If you are investing towards a certain goal i.e. retirement planning then investing in gold can't be a viable option. It is impractical to pin all your hope of wealth creation on gold as it will only end up disappointing you. People can buy gold jewellery, strictly from the point of view of utility. As the jewellery is made of gold, it will be an asset but it will not just serve the purpose of investment. Also, gold can be useful for those Indian women, housewives, especially, who have the habit of putting aside money and stashing it in some dingy corner of the house. Such people, as they are not seeking any returns and just want to retain the value of the money, can buy gold from their accumulated wealth as, unlike cash, there is a possibility of its value getting appreciated with time.

Alternate Routes To Invest In Gold

Don't be confused, I don't see gold as an investment option but I am sure there are many people out there who, despite its limitations, would like to invest in gold. The good thing is that, for such investors, it is not necessary to own gold in a physical form. You should own gold in physical form only when you have to make jewellery like a gold chain, necklace and other ornaments. When you are looking at gold as an investment then you can consider options like Sovereign Gold Bond or Gold ETF. By going through this route, you don't have to worry about the storage and safety of the gold as you don't get delivery of it, but you hold full ownership of the gold you get for the amount you invest. It's just like buying actual gold minus hassle of its safety.

Let's shed some light on the alternate mediums of gold investment

Sovereign Gold Bond

The government of India offers Sovereign Gold Bond scheme (SGB) which is made to provide an alternate option to buying and investing in gold. SGB scheme is offered in trenches. It means, it is only offered at a designated time decided by the government. The series which closed on 27th December 2017, offered 1 gram gold for Rs.2890 with a Rs.50 discount for online purchase.

The scheme has a maturity period of 8 years, however, premature withdrawals are allowed after 5 years.

The core objective of this scheme is to lessen the demand for the physical form of gold which helps authorities to keep a tab on gold imports and also helps to utilise resources efficiently. If you are worried about the purity of gold then be rest assured as the Reserve Bank of India (RBI) issues these gold bonds which bring in absolute transparency. These bonds provide an avenue where people can own gold without actually possessing it which reduces the worries of its storage or safety. Essentially, a Sovereign Gold Bond is a security issued by the government which represents a specific weight of gold. Owning a gold bond of a certain weight is similar to holding that much quantity of gold, just in a different form.

How does Sovereign Gold Bond Scheme function?

The Sovereign Gold Bond Scheme is issued by RBI on behalf of the Government of India. Investors can buy these gold bonds, during the offer period, at post offices and banks. Gold bonds are issued in the denomination of gram. Investors have to pay the bond price in cash. The value of the bonds is connected to the price of gold. As this is a government scheme, it comes with certain conditions. Every individual can buy minimum 2 gm gold and maximum 500 gm in a fiscal year. In return, the bond pays an annual interest of 2.75% to investors. Interest is paid semi-annually based on the initial value of investments issued for the year.

Gold ETF

Like Sovereign Gold Bond, Gold Exchange Traded Fund (ETF) is another way to invest in gold without getting the actual delivery of the gold. Moreover, Gold ETF enjoys more flexibility as it is an open-ended fund which means you can invest and sell at any time you wish.

In a gold ETF, the money pooled from investors is invested in standard gold bullion of 99.5 percent purity. These funds trade on a stock exchange just like the shares of an individual company. Investors can any time buy and sell the units of gold ETF.

Things To Remember While Investing Gold ETF

Investors have to remember that they dont own gold and they will not get delivery of gold in a physical form. To get the maximum value out of gold ETFs is to find a gold ETF that has least management expense (expense ratio). Usually ETFs charges between 0.62 percent and 1.20 percent per annum. The difference in returns of physical gold and gold ETF would be expense ratio charged by the asset management company (AMC).

There are a couple of things investors need to note.

First, the market price of gold ETFs tracks the domestic price (Indian price) of gold. Thus if gold prices are going down, the gold ETFs will reflect the same decline in its price.

Second, there is a misconception about gold ETFs that they can give better returns than buying physical gold. That's not the case, gold ETF is not a medium through which you can beat or exceed gold prices. The underlying asset for gold ETF is gold. Therefore, the direction in which the gold prices move the gold ETFs will follow.

Trade Gold In Commodity Market (MCX)

The commodity market is the platform that gives you an opportunity to gain from the rise and fall of the rates of commodities like gold, silver, cumin, rice, copper, etc. Commodity trading is conducted on MCX and NCDEX and gold is one of the most widely traded commodities in India. It enjoys high liquidity, with daily trades of around 15,000 contracts accounting to a value of over 4500 Crore rupees. Gold is traded in four variant i.e. Gold (The big gold), Gold Mini, Gold Guinea and Gold Petal.

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