The obsession towards gold has captivated the Indian population. It is considered a symbol of wealth, status and has been a part of worship and popular tradition that goes back thousands of years.
The obsession towards gold has captivated the Indian population. It is considered a symbol of wealth, status and has been a part of worship and popular tradition that goes back thousands of years. Acquiring gold is a lifelong goal for people from all backgrounds in our country. Purchase of gold is culturally ingrained in a way that it is the first priority when it comes to investment for a majority of the population. The population holds over 20,000 tonnes in gold and it is also used to raise capital by pledging it as a loan across the country. This is especially true in South India.
Performance of Gold: If you had invested in gold exactly 5 years ago, you would have made a total return of -5.5%. The performance of the yellow metal has been negative during the period as it has been in a continuous downtrend since late 2012. The returns given by gold in the last 1 year is -2.6%. This is although the Indian rupee has depreciated by 19% in the last 5 years (Gold and INR are inversely correlated). When compared to equity markets, the returns have lagged by a huge margin. The equity benchmark NIFTY delivered a total return of 86% in the last 5 years and 18.5% in the last one year.
Best ways of investing in Gold: If you are optimistic about gold as an investment, then the Government of India’s new Sovereign Gold Bonds are worth investing in because of the benefits associated with them. These bonds give an interest income of 2.5% per annum and have a maturity of up to 8 years. They can also be used as collateral for loans. In addition, capital gains are not applicable and completely exempt from taxation if held till maturity. Since, there is no management fees, you can earn a higher overall return when compared with physical gold or ETFs. The more aggressive way of getting exposure to gold is by investing in companies whose business models revolve around gold. Some companies from the gold refining, jewellery and gold loan NBFCs have been tremendously successful in utilizing the yellow metal to build highly profitable business models. This indirect form of gold investment would’ve yielded much higher returns than the metal itself. Collectively, the returns a portfolio of gold stocks delivered by leading companies is around 44% in the last one year as compared to -2.6% returns of gold itself.
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What to avoid: The age-old tradition of buying jewellery is an inefficient way of investing because there are several disadvantages associated with it and it does not qualify as a pure investment. Purity of gold is an issue and jewellers need to be trustworthy with their dealings. The making charges of jewellery are very high and the end-product includes diamonds or precious stones which are practically worthless due to a lack of an organized secondary market. Also, measuring the quality of stones is neither easy or straightforward for most investors. These ornaments create an emotional attachment and act as a deterrent to sell in the future. For the most part, these can be considered dead investments. Most families even avoid pledging their family jewellery as collateral for loans because it is considered taboo or desperate. Less than 2.5% of the total gold in India is pledged for raising loans.
Things to consider before investing: Universally, gold is priced in US dollars and hence, the value of the US dollar is going to determine the overall return of the investment to a great extent. Assuming that gold prices go up 5% in the international market and at the same time the Indian rupee appreciates by 5% against the US dollar, the net return will be zero as the INR price appreciation will offset any gains made. To have a long-term view of gold, it is equally important to have a long-term view of the Indian rupee and its relationship with the US dollar. Retail investors need to spend extra time developing a view of the currency trend to make well informed and successful decisions.
(The Author is Co-Founder & CEO, FYERS, an online investment platform for young millennials)