Gold has long been regarded as a safe haven for investors, which is why money pours into the yellow metal when other asset classes are in trouble. Over the last decade or so, gold is probably the only asset class to have seen a six-fold increase in value. It reached a peak of R33,000 per 10 gram around a year back and is now hovering around R32,000 per 10 gram. One of the reasons for this sudden spurt in gold prices is that when markets are volatile and seemingly collapsing, money flows into gold. It also helps that gold is a ‘physical’ asset (even online gold ETFs, etc., can be converted into physical gold).
However, with a substantial run-up in the yellow metal’s prices over the past few months, the question now is whether the ‘gold rush’ is over, or if it is still a good investment option. It is difficult to predict the movement of gold prices at this juncture due to the substantial increase that they have already seen, and the fact that there are several factors supporting both an uptrend as well as a downtrend. This much is clear that gold prices are no longer one-way street, they can also come down.
It’s advisable to purchase gold at this juncture only for essential requirements such as marriages. One could keep 5-10% of his investment portfolio in gold to diversify. This is especially true if a majority of one’s investments are in equities. One can trade a small amount in gold (if required) but ensure that profits are booked regularly.
There are several options for one to invest in gold: Physical gold, ETFs, gold savings schemes, etc. Let us take a look at the various options of investing in gold.
Physical gold is one of the most popular forms of investing in gold, with India being one of the largest consumers of the metal. The most favoured form of physical gold is, of course, jewellery, and this is followed closely by gold coins and bars. One needs to ensure that the gold bought is genuine and of good quality as well as ensure its safety on an ongoing basis — be it at home or a bank locker.
Another option is gold ETFs that have gained popularity recently. With ETFs, unlike physical gold, one does not hold the gold but stores it in an electronic form — making more secure. Typically, one unit of any gold ETF is equal to one gram of gold. You invest in the ETF and, in turn, the asset management firm buys an equivalent amount of gold and holds it.
Gold funds are another investment avenue. These are mutual funds that invest in companies engaged in gold mining or processing. These are indirect beneficiaries of rise in gold prices. One can invest in gold funds via the SIP route, or like any other mutual fund.
Recently, a lot of jewellers have come up with gold savings schemes. Under these schemes, an investor saves a certain fixed sum each month (this is held by the jewellery company) and the jeweller uses this to purchase gold at ‘the lowest price each month’. They even offer schemes where if one invests for 12 months, he gets an extra month’s investment worth of gold free.
Each option has its pros and cons, with differing price structures and convenience for each. For example, gold ETFs are cheaper options with only brokerage charges of around 0.5% to pay compared to 10-15%-making charges for physical gold. Another advantage of buying gold in electronic form is that the price is linked to international prices and is very transparent, which is not the case with physical gold — where every jeweller has a different price. It is important to keep in mind that investments in gold are taxable at the time of redemption/ sale of the gold.
In case of physical and e-gold, long-term capital gains are calculated after three years.In case of gold ETFs, it is one year (similar to a gold mutual fund). However, one can use indexation to reduce the tax burden. Instead of just looking at gold, one can also consider other precious metals /gems (silver, platinum, diamonds, etc) or invest for the medium term in equity-linked instruments.
The writer is CEO & founder of Right Horizons