Gold has been much maligned by some of the financial gurus, who look at it as a inferior instrument compared to shares. But I believe that Gold (being “gold”) definitely is an investment if you consider it from long-term perspective. The following graph shows the trend of gold price in the past sixty years – appreciating most of the time though not in a consistent, predictable way.
Gold has retained its intrinsic value for centuries across the globe. While there are other investments like shares that give higher returns than gold, they come with a higher risk also (at time of depression or recession, the share values can come down crashing and some companies may even cease to exist). The rate of appreciation is not predictable for gold, but it is one asset which actually gains in times of uncertainty and trouble. Various geo-political factors have led to growing demand for gold globally among investors as well as government – and the trend is expected to continue.
Gold can be used as a hedge against inflation as like other goods impacted, gold price also increases at least at the same rate. In other words, if one gram of gold can buy you 100 kgs of rice today, it is most likely that even after 10 or 20 years, you can still buy at least 100 kgs of rice with one gram of gold. Also, when the prices of shares and bonds decrease, the gold price typically increases – as investors rush to convert their other assets to gold.
Definitely it is worth having “gold” in your portfolio. You can think of gold as “liquid, safe and medium returns” investment.
But it is important to understand that gold in “jewelry” form is not an investment, definitely not so in the short term. Think about it! When we buy gold jewel, it comes with a 15-25% wastage charges and 3% GST and if you try to sell it the next day you will get only around 70% of what you paid. Again there is the question of purity – what you buy as 22 carat and pay for, when you try to sell you may be told that it is of lesser purity! And if you exchange old gold for new ones, it will be valued 1-2% lower and you will pay wastage and GST for the new jewel. And if you to try to sell your jewels, it will be valued at 5-8% lower.
In effect, if you buy a gold jewel paying ₹ 1,00,000/-, the value of the item you bring home is actually between ₹ 60-70K. If we assume that gold appreciates at the rate of 10% annually, it would take 6-7 years for your jewel to reach the value of ₹ 1,00,000/- (the price you paid).
What are the alternatives? Three main ones are buying Gold coins/bars, Gold ETFs and Sovereign Gold Bond.
Buying gold coins and bars. But even that has wastage charges – around 3-11% – depending on the size of the coin. You pay more for buying “ten 1-gm coins” compared to a “single 10-gm coin”. Similarly, what you pay per gram for a 100-gm bar is less than what you pay for a 10-gm coin. And the GST of 3% applies. In effect, if you buy a gold coin paying ₹ 1,00,000/-, the value of the item you bring home is actually between ₹ 85-90K. Also compared to jewels, coins/bars have good resale value.
The next option is Gold ETFs (exchange traded funds) which are passive investment instruments that are based on domestic gold prices. There is no wastage or GST, but a smaller brokerage of around 1%. You can sell the Gold ETFs in stock market and so the liquidity is there. No worries about purity. To buy Gold ETF you need a demat account and there is no limit on the amount you can buy. As per the current rules, if you sell the Gold ETF within 3 years of purchase, you will be taxed as per your individual income tax slab rate. If you hold the Gold ETF for more than 3 years and sell, it will attract long term capital gains tax of 20% along with indexation (will cover more on capital gain tax in a future article).
I think the best option is Sovereign Gold Bond (SGB). SGBs are government securities denominated in grams of gold – the price depends on the current gold price in the market. There is a ₹50/- discount for investors who buy it online. There is maximum buying limit of 4 kg per individual in a financial year. SGB has a holding period of 8 years and the amount you get on maturity is non-taxable. Though there are exit options after 5 years, including selling it in the secondary market, they come with tax implications. The icing in the cake is that the bonds pay 2.5% annual interest on the amount of initial investment (note that is not on the market value of gold).
Even if you are regularly buying gold jewels with your kid’s future marriage in mind, consider investing that amount annually in SGB. As you will get the same amount of gold (number of grams you bought) on maturity, you can buy physical gold jewels when it is absolutely needed. In the meantime, you are getting interest, do not have to worry about keeping it safe and the later you buy the latest designs you can get.
As usual, let me demonstrate using a graph, why all forms of gold are not equal.
The financial gurus’ who ask you to stay away from Gold Jewelry do have a point. Let us say that today you invest ₹ 2,00,000/- and can get 30-gms of gold in SGB., if you buy a pure gold jewel you will get only around 20-gms of gold which when you try to sell will be most likely considered as 18-gms worth.
While Gold is a must have in your portfolio as it has some unique advantages, it is better to use digital form like SGB or ETF compared to buying physical gold – especially jewelry. The thumb rule is to limit gold investments to 5-15% of your portfolio.
Gold always had and will continue to have a special place in our homes and hearts. By choosing SGB as an alternative to jewels, your can make your gold help you meet your financial goals!
#Gold #SGB #GoldETF #GoldJewelry
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