Gold! You love it, but should you invest in it?
Gold. It always makes for interesting conversations at cocktail parties. Sigh! Gone are those days now, not gold but cocktail parties.
Of course, even now, if you mention gold, you will get interest and opinions.
In this post, I want to discuss how you can buy gold for investment. We will also touch upon whether you should invest in gold at all.
Let us start with some bare facts:
We Indians absolutely love our gold. Apparently, we have 20,000 tonnes of gold sitting in our lockers and safes. It translates to more than 1 trillion $s worth of gold.
Wow! A trillion dollars sitting in our cupboards and lockers!
Gold has had intrinsic value throughout human history. It has been used as currency all through and has enjoyed a privileged position n our narratives. No wonder then, that it is still a very popular metal for buying and discussion.
Many of us consider it auspicious to buy a bit of gold on certain occasions, ex. Dhanteras. We also gift gold as the most auspicious thing to give. Got it! Gold is important to us as a metal.
What about gold as an investment.
There are a couple of myths about gold as an investment.
There is a strong belief that gold prices never drop and that gold has given the best returns of all assets.
Below is a graph showing gold price over the years. The graph shows that there have been years where the gold price has fallen. Of course like all asset classes over the years there is a steady rise in price.
The interesting thing for an investor is the lack of volatility. Except for one period over the last 50 years, there hasn’t been too much up and down in the price.
Next, let us look at whether gold has given the best returns.
I am comparing the last 20 years of gold to nifty. The graph below is telling of course. The CAGRs though are a lot closer – Gold has given 11.5% while Nifty 12%. Of course, this is as of Jan, if you look at it right now (Nifty > 17k) then the CAGR for Nifty is 13%+.
So, both of these myths don’t hold true. Gold prices have fallen at times and the Nifty has given better returns over the last 20 years. If you look at a longer period then the difference between nifty and gold returns is even more. The one thing going for gold is low volatility. With gold, there are far fewer ups and downs.
Why should you invest in gold
To create a diversified portfolio you can have gold as an asset. It will hedge against drops in nifty and give you less volatility over long periods of time. Gold has always moved inversely to stocks. If your portfolio drops due to stocks, then gold will shore it up.
Why not hold 50:50 equity and gold
Because gold will not give you the returns equity will. It can be used as a safe haven kind of investment at best. If you are an aggressive investor then of course you don’t need to hedge at all.
We shall leave the diversification discussion here for now and assume that you do want to invest in gold.
So, how to go about investing in gold
There are a few ways you can do this. The most traditional way of course is to go to a shop and buy physical gold.
Buying gold at a jewellery shop
There are a couple of things to keep in mind when you buy gold at a jewellery store (or online). Firstly the gold is 22K or lower purity. Not that it matters from an investment point of view, but if you are comparing online prices then you need to know that the online prices are for 24K.
The other thing is GST, gold currently has 3% GST. That is a cost you bear every time you buy or sell gold. This applies if it is gold coins, jewellery or any other physical gold.
If you are buying jewellery then there is the additional cost you bear – making charges. Also, the cost you pay for a particular design is not necessarily recoverable when you want to sell the jewellery.
Of course, there is the small matter of storing physical gold safely. If you use a bank locker for storage, then that is a cost to be added as well.
In my estimate if you are buying gold for investment then buying physical gold is probably the least efficient way to do it.
Digital gold
There is a relatively new option of buying gold.
There are quite a few providers who will sell you digital gold. Tanishq for instance has a digital gold scheme as well. You can start buying gold for as little as 100 rupees with them.
It is actual physical gold stored in a vault somewhere and you are sold rights to the gold. You technically own the gold, but you are not in physical possession of it.
Taxes are applicable in the same way as physical gold. If you sell in less than 3 years, the profit is short term capital gains and taxed at your income tax rate. If you sell after 3 years then it is long term capital gains and taxed at 20% (plus cess). There is no GST, yet.
Earlier this month SEBI issued a notice banning exchanges from selling digital gold. The stated reason was that digital gold is not a security as per their definition. Also, that there is no guarantee that the provider has actually set aside gold for the transaction. This has put a cloud on digital gold for now.
What about Sovereign bonds ?
RBI has been issuing sovereign bonds for some time now. These are gold bonds where also you own gold in paper form. The RBI will be in charge of your gold.
The best part is that returns, on maturity, are tax-free.
You also get 2.5% interest annually, on the amount you have invested.
There are a few terms and conditions here to be aware of:
Maturity: The bond matures after 8 years. i.e. you will get your money back after 8 years. There is early maturity after 5 years as well.
If you hold it in demat, you can sell it on the secondary market.
But to get the full benefit you will need to hold it for 5+ years. That is when the tax relief kicks in.
So, if you are going to invest and hold gold for a long period of time, this is a very good option.
My one grouse has been that the sovereign bond has always sold at higher than the prevalent market price. This negates the advantage of 2.5% interest.
Is there a simpler way ?
Of course, there are gold ETFs.
A gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price.
One unit of a gold ETF represents 1 unit of physical gold. Earlier they were pegged at 1 gram, now they are at 1/100th of a gram.
Over time this relationship changes by a little. Expense ratios and cash holdings reduce the 1:1 ratio. But the idea is for new entrants to also benefit from the ETF’s tracking of gold prices.
These are traded on the stock market like other ETFs and shares. You can buy and sell them as you please.
They are subject to taxation in the same way that debt funds are. If you sell within 3 years then you pay short term capital gains – as per your income tax rate. If you sell it after 3 years then it is long term capital gains at 20% and you get the benefit of indexation.
The biggest advantage I find with a gold ETF is that you can do small purchases periodically, like a SIP. You can also be opportunistic and wait for dips to buy.
Since we know that in theory gold is inverse to stocks, you can actually wait for dips.
You can also set pre-determined price alerts and buy when the ETF hits your price.
Key Takeaways:
Gold remains an important asset that people invest in, especially us Indians.
Over history, gold has been less volatile than stocks and the returns have also been lesser.
There are many ways to invest in gold:
- Physical gold is the most traditional way to invest. It has issues like GST, making charges, purity concerns and storage.
- Digital gold is another way to own physical gold through a service provider
- There might be issues of trust and guarantee here.
- RBI Sovereign gold bond gives you 2.5% interest every year and at redemption after 8 years, the gains are tax free.
- Gold ETFs are exchange traded funds which you can buy and sell like stocks on an exchange. This is currently the simplest way to invest in gold.
As always, you can read here about the very basics, the ten fundamentals and also about stock market investing. You can also subscribe for future updates on the top right.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
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