While gold jewellery is bought and used for its aesthetic value, it’s ineffective as an investment option.
Dhanteras and Diwali – the most eagerly awaited festivals perhaps in the Indian calendar—are around the corner, giving us the opportunity to indulge ineating, shopping, socialising, gifting, and most of all – buying gold.
But with gold touching a record high of Rs 40,000 per 10 grams last month, many investors may be contemplating whether it is a favourable time to invest in the precious metal. In the short term, most experts expect gold to remain range bound as there are various conflicting forces at play in the global as well as Indian arena, and no single factor seems to majorly influence the price direction.
Gold is a good bet
With the US-China trade wars accelerating the global economic slowdown, central banks around the world are resorting to low interest rates and money printing to stimulate growth. In a world where competing assets such as currencies and bonds are expected to underperform, gold seems like a good bet. Given the gravity of these factors and their potential long-term impact, we see them raising the appeal of holding gold, and thus driving up prices over the long term. Let’s understand how.
Even though this crude analysis of world affairs suggests that gold will be a beneficiary, investors would do well to remember that gold is a time-tested store of wealth. It is thus prudent to keep allocating to gold in a systematic manner and make lump sum purchases when there are corrections. We suggest not more than 10-15% allocation to gold in one’s portfolio. Now, although gold buying during Diwali is majorly motivated by cultural and religious practices, good economic sense also drives this behaviour.
The yellow metal has delivered healthy returns over the long term. Moreover, it has provided essential financial security during trying times like those we are seeing now. But in their eagerness, very often buyers tend to splurge on gold jewellery by convincing themselves that they are investing rather than spending as the value of the ornaments is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.
Jewellery or ETFs
While gold jewellery is bought and used for its aesthetic value, it’s ineffective as an investment option. Not only do they end up paying a high price for this obsession (in the form of storage & insurance costs, making charges, high premiums, GST, lower resale values), it is also prone to impurities and theft.
We thus suggest you consider financial forms such as gold ETFs instead. Every gold ETF unit is backed by 24-carat physical gold, held in secure vaults and is completely insured. They aim to generate returns in line with the returns of physical gold. Being a financial form of investing in gold, there are no making charges or premiums, and are thus more cost-efficient. Gold ETFs are traded on the NSE and BSE, and are very liquid with thin difference between buying and selling price.
So, don’t let the high prices dampen the Diwali spirit as there are rewarding times to come, and remember that buying gold jewellery is not the same as investing in gold. Happy Diwali!
The writer is senior fund manager, Alternative Investments, Quantum AMC