Gold gives to the ugliest thing a certain charming air, for that without it were else a miserable affair.
Traditionally, investors have embraced gold as a safe haven for portfolio protection during political tensions, geopolitical turmoil and economic turbulence. Gold prices, historically, tend to surge significantly only during periods of negative real interest rates when gold reclaims its traditional role as store of wealth that would at least keep pace with inflation to preserve the purchasing power of the investment. Bonds have a committed return, in the form of coupon / interest, which would result in real positive returns most of the times, or sometimes a loss, depending on movement of interest rates.
Gold has served as a strategic asset which acts as an effective portfolio diversifier and aids in improving risk adjusted returns while adding liquidity during periods of crisis without side effects of impact cost or difficulties in timing the market. As per analysis of world gold council on the hypothetical portfolio based on Willis Towers Watson Global Pension Assets Study 2019 and Global Alternatives Survey 2017, allocation of 2.5-10 per cent investment in gold provides an optimum hedge over the long run while considering returns, portfolio volatility, risk adjusted returns and portfolio drawdown.
Gold has historically protected investors against extreme inflation. In years when inflation in India was higher than 6 per cent gold’s price increased 11.5 per cent on average. Further, research by Oxford Economics shows that gold should do well in periods of deflation as well. Such periods are characterised by low interest rates and high financial stress, all of which tend to foster demand for gold.
Gold as an asset class
There is an opportunity cost of holding gold as unlike bonds or equities, gold doesn’t pay any interest or dividend. Gold’s effectiveness as a hedge may help the risks associated with portfolio volatility and thereby help in improving risk adjusted return.
Looking back almost half a century, the price of gold has increased by an average 14.1 per cent per year since 1973. Gold’s long-term return has been higher than Indian stocks and higher than Indian government bonds, also outperforming other major asset classes
Methods of investment
Investment in gold can be done through physical gold, digital gold, sovereign gold bond, Gold ETFs or multi-asset funds. Every mode of investing in gold has different benefits and the choice depends upon the investor’s time horizon and other requirements.
PHYSICAL GOLD
Jewellery
Indians certainly cherish possessing gold. But owning it in the form of jewellery has its own concerns about safety, high costs, and outdated designs. Then there are the ‘making charges’, which could prove to be a costly affair. The making charges on gold jewellery, which typically ranges between 6 percent and 14 percent of the cost of gold (may go as high as 25 percent in case of special designs) are irrecoverable.
Gold Coin Scheme
Gold coins can be bought from jewellers, banks, non-banking finance companies, and now even e-commerce websites. The government has launched ingeniously minted coins which will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other. The coins are available in denominations of 5 and 10 grams while the bars will be for 20 grams.The Indian Gold Coin and Bar will be of 24 karat purity and 999 fineness carrying advanced anti-counterfeit features and tamper proof packaging. All coins and bars will be hallmarked as per the BIS standards.
Gold savings schemes
Gold or jewellery savings schemes come in two forms. A typical one allows you to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweller) at a value that is equivalent to the total money deposited, including a bonus amount. This conversion is done at the gold price prevailing on maturity. In most cases, the jeweller adds a month’s instalment at the end of the tenure as a cash incentive or mayeven offer a gift item.
PAPER GOLD
Gold exchange traded funds (ETF)
An alternate way of owning paper gold in a more cost-effective manner is through gold exchange traded funds (Gold ETF). Such investments (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. What’s more, the high initial buying and even selling charges that go into owning jewellery, bars or coins gives an extra edge to the low-cost gold ETF. The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold and therefore the benchmark is the physical gold price.
Sovereign Gold Bonds (SGB)
Sovereign Gold Bond is another way of owning paper gold. They are issued by the government but availability is not ‘on-tap basis’. Instead, the government will intermittently open a window for the fresh sale of SGBs to investors. This could typically happen every 2-3 months and the window will remain open for about a week. For investors looking to purchase SGBs anytime in between the only way out is to buy earlier issues (at market value) which are listed in the secondary market.
Digital gold
You can now purchase gold coins, bars and jewellery online. ‘Digital Gold’, is offered on the mobile wallet platform of Paytm and ‘GoldRush’ is offered by the Stock Holding Corporation of India on their website, while Motilal Oswal has launched Me-Gold, a digital gold online investment. All of these are offered in association with MMTC – PAMP, (a joint venture between public sector MMTC and Switzerland’s PAMP SA)
Get clarity as to why you need to invest in gold – is it for marriage purpose or for pure investment. For investments, one should not have more than 10 percent of the total portfolio in gold. Choose between Gold ETFs or SGBs depending on how comfortable you are managing investments online and keep the worries of purity, security aside.
To be noted:
(a) The sanguine returns from gold includes rupee depreciation. For Indian investors, the global appreciation of gold prices is augmented as the landed or imported cost of gold is relevant
(b) we are doing the comparison after the significant up-move in gold prices due to global uncertainties.
For the investor, it is better to take a portfolio allocation approach, which would optimise risk-adjusted returns.
Looking at the latest returns from gold, one would be tempted to allocate higher. However, the current bull run would continue till uncertainties persist
Disclaimer: All the views in the Blog is personal of the author not attributing to anyone.
