How good is gold as an investment?

gold as an investment

With Equity Markets going negative and showing heavy volatility, Panic in debt markets after the Franklin Fund action, Falling rate of interest in fixed income segment, Gold has once again attracted the Investor’s eyeballs. Everyone has started asking “How good is gold as an investment”?

And I am wondering if this is because of the Returns it has shown in the recent past or is it due to its reputation of being a Safe haven or Hedge against Inflation?

Though it is better than 2008 -09 when Investors used to say, sell everything and buy gold.

This time at least they are asking, want to learn and discuss, and then decide. Yes, this is True…Shayad Sach Mein, Desh Badal Raha hai 😉

Investment options in gold have also increased. Now you can invest in gold not only through jewellery or Gold coins but also through the other options like Gold ETF, Gold Funds, Sovereign gold bonds. 

The new options may not give you the real asset feeling, but you can take benefit from gold price movements. So Investing can also be done on a click of a mouse or a touch on app 🙂

One thing is sure, that if Equity markets were rising, no one would have asked about the gold. In fact, gold also would not even be showing any growth, in those times.

It is only when fewer people are buying equity, more are buying gold. Because money has to be invested somewhere.

But is this the only reason for the rise in Gold prices which is the cause of Investor’s Interest nowadays? And if yes, Is this a valid reason to add gold as an Investment in the Portfolio? 

In other words, should you invest in gold? How much of the gold allocation is wise to have in an investment portfolio and what are the best ways to invest in gold? And if it’s not advisable to have gold as an investment, then why not? I will try to answer all these questions in this article.

Let me start with the Reasons behind Gold Prices rising in recent times. And I would like to keep it very simple. Still, if you feel I have gone technical somewhere, please do point in the comments section.

When the world is at a halt, and India which is the second-largest consumer of gold in the world is not buying gold then what is actually driving the Gold prices? 

You need to understand that when the prices are impacted by demand, supply, and respective country’s taxes, the major factor that Impacts gold is the Dollar prices.

With the World Investment markets in Panic, and Foreign Investors withdrawing money from the world markets there has been quite a big flight of capital from Indian markets too, which has put pressure on the INR VS USD.

Gold which is valued in Dollar terms saw a spike in its prices due to the Currency reasons, as well as the rise in demand of it as people and even countries, feel safe in there.

Come what may, with whatever economic reasons we have and understand, USD is still considered to be the safest currency, and investors feel safe in the US Treasury markets, which is why most of the commodities are valued in Dollar terms only.

Whenever there is any big economic event, or any event having big economic impacts, you will find huge currency movements. If it’s a country-specific, then that country’s currency will get impacted vis a vis Dollar.

On the other hand, when things are going well, as was happening in 2003-08 times, we in India were experiencing quite a good investment inflow and had even seen USD to INR at around Rs 38/-, in those days Gold did not see any exciting growth.

It is only in 2008 when again the world economy went into a kind of slowdown due to the Subprime Fiasco, we again experienced dollars moving out of India, and yes, in such times Investors feel safe in gold, so demand also increased which led gold to rise again and averaged out the past years’ prices.

Gold as an investment - Gold Price trends
Source: goldprice.org

Please note that currency movements have their own factors impacting it. Demand and Supply are only 2 of them. The respective country’s economic growth and investment opportunities are another. When US Stock Markets had generated ZERO kinds of return during 2000-2012, the investments were moving to other countries.

gold as an investment - INR USD Relationship
Source: tradingeconomics.com

And when no country was doing good, money started flowing again in Gold and the other safe-haven like US Dollars. It happened in 2013 also when the past and then returns were looking mouth-watering, and I received lots of queries and wrote this article to put my point.

And you can very well see in the above graphs that 2013-2018, there were not many currency movements and thus gold price movements.

Gold does not have any fundamentals of its own, its prices depend on the global happenings, and comes out of fear – Fear of Slowdown, Recession, Inflation.

This time also the reason is global, impacting the world at large (India too) and thus driving the gold prices (or Dollar prices), as well as its demand.

Is Gold a Good Investment Avenue? after all, it never falls

Well, here I would say that you have never seen it fall because you have never sold it.

Gold in India also carries an auspicious value. And once bought (In Physical) never gets sold. We only give it as gifts, pass it on to heirs or exchange the jewellery (the personal asset) for the new design.

Moreover, the price if not correcting in monetary terms does not mean it is not falling. There is something called “Time Correction”. 

If you have bought gold as an investment in 2012 and found the same price in 2016, then in 4 years the prices have corrected in “time value of money”. In simple words, when you have not gained, you have lost to inflation. 1991 to 2005 there was NIL growth in gold value in Price terms, so big money has lost in Time terms. 

You must be thinking that this happens in every investment asset. In the equity investments also you have seen many time periods when it has not given any return, in the last few years you have also experienced defaults in debt markets which has impacted the returns badly.

I completely agree with this. And because of which Investing in Gold cannot be ignored completely. That’s why we add Gold as an Investment asset as a part of overall asset allocation. 

The times like today may excite you to increase the gold or even shift debt/equity to gold which is not a wise thing because even with all the reasons or near term performance you may see, equity still has a good fundamental value and helps you participate in business growth, and thus beats inflation.

Debt has its own role and in times like these when we see falling interest rates, Fixed income segment may look dicey buy the tradeable debt through Mutual funds or otherwise, supports well and provides reasonable growth to the portfolio. (Read: Why Debt Investments are Important in the investment portfolio?)

And when nothing is going in the favour (which is a rarity) or if at all happens does not stay that way for long, then gold comes into the scene.

When should you add Gold as an Investment in your portfolio?

  • If you are buying jewellery or coins, then you need to consider the same in your asset allocation. 
  • If you have a certain goal in mind, like buying for a Children’s Wedding.

What are the Best ways to Invest in Gold?

You may either buy gold in Physical forms like Jewellery or coins or bars or may go with the electronic form. In the latter, you actually invest in Gold Prices and thus benefit from its movement.

There are many ways to buy gold in electronic or paper form. You may buy it as:

1. Gold ETF or Gold Funds – Both of these are mutual funds, and aim to track the domestic Physical gold price. Gold ETFs(Exchange Traded Funds) can be bought and sold on Stock Exchange Platforms. Gold ETF units are backed by Physical gold of highest purity. 

(Read: Gold Jewellery or Gold ETF…what is better?)

When you sell an ETF you don’t get gold but the cash equivalent

If you are not comfortable buying gold in an ETF form which is a Dematerialised form since you buy it through the stock exchange, the other alternative is to invest in gold through gold funds. 

These are a kind of Gold Fund of funds which further invest in gold ETFs, but you can buy them just like you buy other mutual funds. 

The major difference in Gold ETF and Gold funds is the cost and liquidity. The cost (Fund expenses) in Gold Funds are higher than Gold ETFs, but here the fund house also ensures the Liquidity of the same as you need not find a buyer of your Fund on the stock exchange and you may directly sell it to the fund house.

Know more about Gold ETF.

2. The Other Way to Invest in Gold is by buying Sovereign Gold Bonds.

The sovereign gold bond scheme is another kind of investment in gold in paper form. These bonds are issued by RBI and have sovereign (Government) guarantee attached. The value of these bonds would be linked to the Price of gold.

The government gives annual interest on this investment as well as it is exempt from capital gains taxation.

See the details on the Sovereign Gold Bonds scheme from here.

Conclusion: Should you Invest in Gold?

Well, it’s not a Clear ‘NO’. But the ‘Yes’ comes with some thoughts. 

Since gold is a Global asset valued in Dollar terms so along with Demand & Supply, it majorly depends on the INR USD Relationship. Plus the fear fuels its prices.

If you have confidence in India’s growth, and Government action on the revival of the economy which may lead to the coming back of the Foreign Investors, then you may see INR getting strong again.

If you are confident in the Indian economy and companies to regain strength and thrive, then you may see the money flowing into those companies and equity markets start performing again. And that time also Gold will lose its sheen.

So then this may not result in Fall of Gold prices as that may get settled with the Demand of the same or No selling by investors, but normal economic times are not good for Gold, and Good economic times are actually bad for gold.

But since, like bad times, good times also have its hiccups, so you may consider gold as an investment, and add some of it in your portfolio, by not expecting it to keep always delivering.

What are your thoughts on gold as an investment? Do share your experiences with gold as an investment avenue.

3 COMMENTS

  1. Dear Mr Manikaran Singal sir,
    Thanks for the analysis and many points precisely explained in your article.
    Allow me to pen my following thoughts which may bring some more clarity about this investment option in the present scenario;
    [1] As an independent investor, I am wondering if the response of investors who are buying the “Sovereign Gold Bonds 2020” is any indication of the success of this scheme.
    [2] On the other hand, if too many persons are investing in this scheme, will it affect the expected growth in the next few years.
    Thanks and best greetings,
    J. J. Joshi

    • Hello Mr. Joshi. I am glad you liked the article. The answer to your first question is yes. Though I also feel that in India people still prefer to keep physical gold, but, with the increasing financial literacy, marketing of the scheme, plus the rise in gold prices which is not visible in Physical gold, SGB is surely gaining traction.
      On your second question, as I mentioned in the article that it’s not only the demand and supply, but the economic conditions around, plus the currency fluctuations impacts the price of the gold. Even if too many people buying SGB there are restrictions on the type of investors, plus on the purchase of maximum quantity, so I don’t think that would impact much on the Prices in any way, at least for now.
      This theory came in 2008 also when they say that gold has a limited supply and too much demand will increase its prices, and which is why the Gold mining companies, worldwide also started showing decent growth, but once the dust around businesses settled, and economy came back on track the money started moving to the other asset classes.

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