Gold prices have appreciated in the last few quarters following some volatility in the global markets. While some believe that this may be the right time to invest, another perspective is that prices have already gone up by 20 per cent in a short span and therefore any great appreciation in the near future seems improbable.
The value of gold has appreciated in the last few quarters following some volatility in the global markets. During times of economic uncertainty, gold is the go-to investment option. While one school of thought is that this may be the right time, another perspective is that prices have already gone up by 20 per cent in a short span and therefore any great appreciation in the near future seems improbable.
Those are the thoughts that we will explore in this article.
How the prices changed recently
While gold has shown immense resilience in the last few quarters, there’s recently been a surge in prices. It has regained the heights of 2012 when it had breached the Rs 31,000 mark for 10 grams. The period in between had ups and downs, and it now stands at the same level as four years back.
Let’s understand some of the factors that may have contributed to the surge in prices of gold.
First, the global economy, despite intermittent green shoots, doesn’t inspire confidence. The world economy is still in a low-growth phase since the 2008 crisis.
Second, the much-awaited big bang reforms in emerging markets such as India doesn’t look imminent. There have been uncertainties in those regarding growth and the general direction of economy. The Chinese economic growth has tapered off from the days of double digit growth and is now hovering below 7%. Some observers feel the real growth rate could be as low as 5%.
In India’s case, the GDP data has been questioned in some quarters and may not reflect actual growth. Looking at supporting data such as IIP numbers, service sector growth, or core industries’ performance do not add up to the GDP story.
Additionally, the Brexit turmoil spooked global markets though they seem to have recovered faster than expected. All these events have added to prevalent uncertainties.
And since gold is seen as a safe bet against uncertainty in turbulent times, its prices have soared.
What should investors do?
There is no easy answer, simply because, as the saying goes, the future is not what it used to be—predictable and consistent to a large extent. However, it is a good opportunity for investors to park a part of their money in gold. It is a safer investment compared to many other options. Even when gold prices went down, they fluctuated between Rs. 25000 and 28000 per 10 gm. Some equity options have experienced wider fluctuations.
Gold may not fall below a point (as stocks do) because there are always investors who gobble it up when prices go down.
At the same time, investing in gold is not enough. You have to also monitor your investment closely and assess your options every six months.
Ways investors can invest in gold
There are a few options for investing in gold.
The first is the old way: buying gold through coins, jewellery, and bars. Remember to buy them only from authentic sellers who provide guarantee of purity. This form of gold investment is easy to buy and sell. However, safe-keeping of physical gold is a challenge.
The second is gold ETFs – exchange-traded funds. ETFs are held in a demat form and are brought over a trading platform. Various AMCs sell gold ETFs and you can pick one to get started. Trading charges are low and since the investment itself is in demat format, you won’t have to worry about where to store the gold.
The third option is the government-backed Sovereign Gold Bond scheme, a great product in many ways. It will not only provide you capital gains but also give you an interest of 2.75% annually on your invested amount. There’s no income tax on the redemption of gold bonds on expiry. It is eligible for long term capital gains tax at 20% after three years, with indexation benefit. Another advantage is that it can be held in paper or demat form, which further reduces the risks in storing physical gold.
You can also purchase e-Gold from NSEL (National Spot Exchange Limited). This can be done using your demat account with any depository empanelled with NSEL. E-Gold is in digital form but it can be converted into physical form at any of the designated centres of NSEL.
The author is CEO BankBazaar.com