Today is Akshay Tritiya (or Akha Teej / Akshay Teej) – a day which is considered auspicious to donate to the needy or to present something to dear ones or to start a new trade/venture. It is also considered a good day for weddings. The savvy marketers of modern times have made this day auspicious solely for buying Gold. So you see hoarding, advertisements, surrogate advertisements and advisories extolling you to buy Gold today. For the believers and non-believers alike, the main question is – Is Gold a good buy as an investment? If yes, in what form should it be bought?
Gold as an Investment
Gold has a unique position as an investment. It thrives on economic volatility and chaos in the world – a throwback to the days of Gold Standard instead of the current Dollar Standard. That’s why, various financial crises – sub-prime crisis, dollar meltdown, Eurozone problems etc – in the recent past have seen Gold going through one of the most spectacular rallies ever. Consider the chart below:-
|Last Akshay Tritiya Date||Price that day (Rs, 10 gms)||Annualised Returns till today|
|Today (24 Apr)||28803||31.48%|
|06 May 11||21906||24.91%|
|17 May 10||18548||24.61%|
|27 April 09||14885||24.67%|
|08 May 08||11922||–|
As you can see, returns have been far better than what any other investment has given. But will it continue its dream run? May or may not. If the world’s economy stabilises, if no new crisis takes place, it may not. If world continues in a flux, it may continue to appreciate depending on how deep is the crisis. How do we see it today? We feel that the world is turbulent enough (and the crises are not going away anywhere too soon) for Gold to offer a good value for at least one more year. Nobody knows beyond that.
How to Buy Gold for Investment
Primarily Six ways in which you can invest in Gold:-
- Jewellery – Good for personal use but not good as an investment. Problems – difficult to be sure of purity (unless you pay huge charges for Hallmarking), coloured stones embedded in jewellery sold by Gold rate but rejected while selling back, storage and carriage problems, high making charges which are lost the moment you buy the jewellery piece, no standardisation of prices amongst jewellers and the Indian mindset of never selling Family Jewellery (thus it does not serve the purpose of an investment).
- Coins/Bars – Easy to buy but very expensive. Today’s 24-carat Gold rate (9.15 AM, 24 April 2012) in Mumbai Bullion market is Rs 28803 per 10 gms. Of the banks selling it, cheapest is SBI at Rs 30,519 (6% mark-up), PNB is giving at Rs 31,888 (10.7% mark-up) and ICICI Bank is giving at 33,447 (16% mark-up). An investment made at such high prices may take long time just to get even. Also, as per RBI rules, Banks are not allowed to buy back any Gold, not even their own coins. That way, ‘trusted jewellers’ are a better bet as they will most likely buy back what they have sold to you when you go back to them – but finding a ‘trusted jeweller’ is an exercise by itself.
- Gold ETF – Gold Exchange Traded Fund. Paper Gold – it is like your money in the bank. Most efficient way to buy and sell gold. Done on stock exchanges at the price of 24 carat Gold at that moment in the bullion market – no mark-up. No problems of purity, storage/carriage and no time lag in buying or selling. Can buy or sell from 1 gm equivalent onwards. Benefits of Long Term Capital Gains available after one year itself. Problems – you don’t get to hold it in your hand, cannot buy less than 1 gm and there is no procedure of ‘Systematic’ buying automatically on a regular basis.
- Gold Mutual Funds – Similar to Gold ETFs with all its advantages but taken through the Mutual Funds route. Additional advantages are – do not need a demat account, can buy on a regular basis (generally once a month), and investment could be from as low as Rs 100 per month or Rs 5000 in bulk with no upper limit. Disadvantage – generally 0.5% transaction charges additional to ETFs, but that does not amount to much anyway.
- E-Gold – Another form of paper Gold bought on NSEL (National Spot Exchange Limited). Need a separate demat account for it. Advantages same as Gold ETF. Additionally, transaction costs and liquidity is better provided you are buying it in large quantity. It can also be converted to physical Gold at additional cost. However, it makes sense only if you are going in for large quantity of Gold. For small quantities up to 50-100 gm, it may not be beneficial.
- Gold Futures – These are ‘Futures Contracts’ on Commodity Exchanges such as MCX and NCDEX. These are meant for sophisticated investors who understand the associated risks since these have the potential to make or lose big money. Meant for traders and speculators with a high risk appetite.
Gold is definitely investment-worthy even at current high rates but remember:-
- Gold ETFs / Gold Mutual Funds are the best way to buy Gold for investment.
- Since Gold prices are quite volatile, better to buy regularly in small lots. Gold Mutual Funds score over ETFs there.
- Never should Gold form more than 10% of your portfolio. If your total investments (excluding real estate) are, say Rs 10 Lakhs, Gold should be maximum Rs 1 Lakh. Similarly, if you contribute Rs 10,000 per month to savings, Gold should be Rs 1000 pm.
- Remember, despite its fabulous returns in the past few years, Gold, in the very long-term, tends to move just along with inflation rate. Hence, it is actually a hedge against inflation only. Do not go over-board by stocking up a major part of your savings into it. Do not forget the drastic fall it had in 1980!
Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM,
CEO, Hum Fauji Initiatives,
Your long-term partner for wealth creation
9999 022 033, 011 – 4054 5977 (Off), humfauji.in