Is Gold a good long term investment ?
Mar 12, 2014 | 13:04 PM IST
Mar 12, 2014 | 13:04 PM IST
Is Gold a good long term investment - What are the options available with investors here to
invest in Gold ?
Gold lives with the idiom worth its weight in gold. Among all precious metals gold is considered to be the most valuable investment options. For non-risk takers gold investment leads to diversification of their portfolios. Gold moves independent of other asset classes which reduces risk and thereby probable losses. However, like any other market, gold is also subject to speculation which is done through its F&O trading.
However Gold cannot be produced with the same velocity as its demand. It is often correlated with inflation as a hedging instrument which is considered totally safe in uncertain times. Investors adopt a Step-by-step buying policy in gold with an intention to accumulate it and ultimately sell off the previous lot at a much higher price keeping the current purchase intact.
Options for gold investment:
Gold was treated more as an insurance against uncertainty than for hedging against inflation. That is why the inclination of investors towards gold increased after the 2008 stock market crash. Gold was then considered the only safe investment option. The gold price increased more than double since the year 2008. Volatility in the stock markets, falling GDP, rising inflation, Realty threats has increased demand for gold.
1. Gold bullion in the form of jewelry, bars, and coins has been widely practiced in India. India was the top gold buyer in the world until last year when Government imposed heavy import duty at 10%. The use of gold in festive and wedding occasions has kept the demand accelerating. But this kind of investing seems to be the dead investment as this kind of buying is never done with the intention of selling back for profits. So buying jewelry cannot be considered as an investment but an expense symbolizing wealth.
2. The second highly practiced investment option is the exchange traded funds. It is a mutual fund for physical gold buying where each unit is equal to one gram gold and gold is an underlying asset. ETFs are units representing gold in physical form or demat form. These are traded like any other stock. It is the best investment option for small and diversified Investors wherein they invest in shares of the Funds that buy gold. ETFs became more popular because;
No premium is charged on making or delivery.
No risk of physical handling and thereafter arising adulteration or impurity threats.
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More liquid than any other form of gold investment.
Transparent and cost effective.
Gold mutual fund is a fund of funds that has gold as its underlying asset, and would primarily invest in its own gold ETF. Gold Mutual Funds acts as an intermediary between the investor and gold ETF. India has no gold funds that earn physical gold directly. They invest in other MFs or ETFs that own shares in international mining companies.
E-gold is still a better investment option. E-gold gives higher returns than ETFs as the Net Asset Value in E-gold is arrived at after deducting storage and custodian charges and asset management fees. The trading cost is also lower than ETFs. E-gold is in demat form which can be converted into physical form anytime.
3. Investment sake buying of pure gold is most popular option. 24 karat gold coins and rings are easily available. Disadvantage in this kind of gold buying is safety issue.
Before you invest in gold:
Gold cannot give you the recurring income except for dividends from gold ETFs. Moreover it just increases the cost if held in the physical form and kept in the lockers. It releases the benefit only after sell-off.
Gold is not a riskier investment option as we hardly see any deflation phase in the Indian economy. Practically speaking, neither food prices nor gold fell when India faced deflation two years back.
Gold is the most liquid investment option as compared to others. Gold can be sold at any time of the day against cash. Moreover gold can be exchanged against the possession of new jewelry. However, it comes with the making and wastage charges.
Gold if held for less than three year attracts a capital gains tax at 15%. However, Gold can get indexation benefit while calculating the capital gains, which can duly reduce the amount of tax charged. Long term investment is tax free.
Current investment Scenario:
Gold has accelerated consistently for past 12 years which hardly any investment option has fetched so far. Thus analysts see obvious correction in the gold prices to give any further bounce. This correction shall ultimately be used for buying on dips, which will require some more time.
After the biggest rally gold prices fell drastically in most of the countries except India. Here we can see some retracement in gold prices. But the fall is relatively less as compared to the other countries. India has witnessed currency depreciation and Government levied 10% import duty. Moreover, Gold is the second largest import after oil and oil imports are inevitable. So Government put restrictions on gold import and thought ways that the holders will sell-off in gold. As a result gold demand in India reduced last year. Moreover, government decided to keep aside 20% of the gold imported to use for export purposes. By this India succeeded in containing its Current Account Deficit up to 4.8% of the GDP. Lets see how long it works. In Q3 of FY14 the CAD has further fallen to 0.90 of GDP which has positively impacted the rupee.
Among gold ETFs, look for those with high liquidity. Currently, ETFs from Goldman Sachs (Gold BEES), SBI, Kotak and Reliance enjoy high liquidity.
Among funds, Kotak Gold fund, Reliance Gold Savings, Birla Sun Life Gold and Quantum Gold Savings have delivered superior returns.
We have discussed various investment options here. Gold prices are dependent on various macro level factors like currency valuation, liquidity conditions, International volatility indices etc. It also has a sentimental value that inclines towards the safety and looked upon as rescue funds during economical turmoil on a personal level. We would like to suggest that systematic investment in this precious metal is a very good tool for hedging.
To summarize, all that glitters is not gold and every gold that glitters is not sold, specifically in the country like India. The long term view on gold is positive and so periodic investment at every dip is advisable.