Should you buy gold & in what form?

It is a traditional asset that has been popular for millennia. Gold is a unique metal, in the sense that it is very malleable and ductile and lends itself to making intricate jewellery. Across the world, ornaments were made out of gold throughout human existence. 

Gold is seen as a storehouse of wealth and as an asset which would always have a certain intrinsic value. Gold has been used as a currency for a very long time. 

Gold is a rare metal. It is available in limited quantity and its supply cannot be increased at will. Hence, this ensures that the price of gold stays at a certain level. 

This comes even more in focus as governments today are printing currency to infuse liquidity as well as fund deficits, stoking inflation which ends up eroding the value of the currency. In these kind of situations, gold will continue to hold its value, thereby act as a hedge.

Gold as an asset has a negative correlation with equity and currency for the most part, which brings down the risk in any portfolio when gold is included. 

The point which we need to understand is in what form should one make investments in gold. Gold investments in the form of ornaments is not an investment at all.

For one, ornaments are a personal possession and would have a lot of emotions attached to them. Hence, one may not sell gold in the form of ornaments unless one is truly in dire straits! Ornaments are actually consumption items. This can be likened to a residential home which is a consumption item and cannot be treated as part of one’s wealth as it cannot be liquidated. 

Added to this, gold ornaments have many charges which cannot be recovered while selling, making it a poor investment choice even otherwise. 

One may want to buy gold bullion, i.e., in the form of pure gold coins, bars etc. Even in this situation, there is a differential of 8-12% between the market price of gold and the price at which one would buy bullion. Also, there would be storage and insurance costs in case of physical gold, which depresses the returns.

A better option would be to invest in gold through financial instruments which track the prices of gold.

Gold exchange-traded funds (ETFs) invest in gold. It is a financial instrument traded on the stock exchange and one can buy or sell these anytime. The one running the ETF will buy gold in bulk and handle storage, insurance, purity checks etc. The cost differential between the market price and the price at which they buy will be negligible.  

The gold index fund, which again tracks the price of gold, is another financial instrument worth considering. These typically will invest through a gold ETF. The cost to the investor might be slightly higher here. But, gold index funds have guaranteed liquidity from the mutual Fund house, which will buy the sellers units.

The best option for investing in gold has come from the Government of India in the form of Sovereign Gold Bonds (SGB). This instrument comes with a tenure of eight years and it will track the price of gold. Also, this bond will offer a return of 2.5 per cent a year. This clearly makes it much superior to all other gold investment options since this 2.5 per cent is an extra return. Also, there is no capital gain tax if it is held to maturity. As an investor, you have an option to exit from the scheme post the expiry of lock-in period after five years.

If you exit from the scheme after five years, any capital gains arising from such a sale will be taxed as long-term capital gains at 20 per cent with indexation. However, TDS provisions will not be applicable at the time of maturity or sale of the bonds.

Unlike other options, this is not available for purchase throughout the year. But one could buy it from secondary market sources, as per the availability. 

This infobite is taken from the book – If God was your Financial Planner, written by our founder & managing director, Mr. Suresh Sadagopan. You can also read his book to know much more about financial planning, personal finance and our approach itself. It is written in an easy-to-read storybook format.