Gold as an Investment – Everything You Need to Know

Nitin Agrawal
Nitin Agrawal
nitin@orowealth.com
gold as an investment
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A Brief History of Investing in Gold

For centuries, gold has held a special esteem in everyone’s hearts. It is a very precious metal and has always been treasured for its attractive and very unique properties. Purchase of gold as an investment started only after 1970 when the US made it legal again to own and trade physical gold. In India, gold coins were first introduced 2000 years ago by the Indo-Greek rulers and were attributed to the kings. The modern gold market was introduced in India after the abolition of Gold Control Act in 1990. The Gold Control Act only allowed authorized dealers and goldsmiths to hold primary gold. However, this legislation was dissolved in the 1990s. After this, gold as an investment became open.

In the present world, gold is mostly bought as a hedge against inflation because, during times of economic instability, it is better to invest in tangible assets to save them from market crash and also during these times the price of gold rises considerably.

Why Should One Invest in Gold?

All around the world, gold is respected for its value. It has always remained a prevalent and smart investment choice across the globe. It has evolved to being used for virtual trading from being simple a corporeal asset. There are many reasons as to why one must invest in gold.

Even though it is rare, gold is a mainstream asset and strategic asset. Gold has always maintained its value throughout generations and is a good way to pass on wealth. It won’t be wrong to say that gold is an ideal way of long-term wealth preservation.

One of the reasons why people prefer gold as an investment is because of it a scarce metal and very hard to produce naturally. Did you know that all the gold that has been mined till date can be fit into a 20 meter by 20-meter box? Yes, you read it right!

As compared to other financial assets, gold provides competitive returns and positive results. Gold also has a very high purchasing power as a number of assets, goods and services can be bought using gold. This is one of the major reasons why gold as an investment is a very reasonable option. The currency may lose its power during times of extreme deflation or inflation but gold has managed to uphold its purchasing power. Therefore, gold acts as a hedge against inflation.

Gold is also treated as money. It is not a declared currency but its role as a currency and its other features make it superior to any other currency. Gold is a tangible asset and it cannot be hacked or erased. It cannot be destroyed by even fire and it takes no maintenance. Therefore, it is not subject to risks which come with paper documents.
Used for portfolio diversification, gold has a negative correlation with stock and other financial instruments and hence is one of the perfect choices to diversify your portfolio and reducing the general risks. There is a supply constraint is seen when it comes to gold and a really high demand which makes it a great option for investment.

Importance of Gold as an Investment in the Indian Economy

Gold has its own economic value in India like steel, crude, cement, etc. The nation is the largest importer of gold in the world and when the value of import exceeds the value of export there is a decline in GDP. As gold is imported, consumers of gold are basically selling the Indian rupee in exchange for gold, which is foreign currency. This procedure leads to the depreciation of the rupee because it disrupts the equilibrium of the money entering and leaving the Indian market. This, in turn, makes the Indian currency fall and the expense of imported good is increased.

Therefore, the entire economic chain is affected when we treat gold as an investment and purchase it from outside India. The government of India has increased the import duty on gold by 15% as a countermeasure against rising imports of gold in the country.

At the end of 2008, when the financial crisis shook the global markets, a trend of investing in gold by the regular investors started and they started assigning a definite volume of their portfolios to gold because it acted as a hedge against all types of improbability. Even when there is a global financial uncertainty, gold comes to the rescue.

Pros and Cons of Investing in Gold:

Gold as an investment has many benefits such as:

1. It is comparatively easy to sell gold coins.
2. The gold content of the coin can be tested by the investors when they buy the coin.
3. It is very satisfying to possess and own gold.
4. There is a potential upside in investing in gold.
5. There is inflation insurance when investing in gold. Even during the time of inflation the value of gold never depreciated significantly and gold manages to uphold its position in the market.
6. Apart from inflation insurance, there is also disaster insurance when it comes to investing in gold. No matter how bad times get, gold is always a safe way to invest and will always be in demand.
7. There is a simplicity in buying gold. It is easier to buy gold than to figure out which are the other ways of investment. Like property or stocks, etc.
8. The tangibility of gold is one of the pros of investing in gold. It can be touched and retains its value.
9. It does not require any maintenance.

There are also some drawbacks of investing in gold

1. There is no yield in investing in gold like receiving dividends by investing in share or collecting rent by investing in a property.
2. There are low capital gains when it comes to investing in gold. Other investments like property and shares gain more value in time than gold does.
3. Gold is a rather annoying commodity to transact. There is often a significant margin set by the dealers and authenticity is always an issue. Also, while selling gold it is important to prove that you are the rightful owner of the gold.
4. It is hard to store with many limited options of storage.
5. Old gold coins can be very challenging to verify.

Different Ways to Invest in Gold:

There are many different ways to treat gold as an investment in India:

1. Buying jewelry

Jewelry buying is a very old and traditional way of investing in gold. Although this may involve high costs because when jewelry is bought, often heavy making charges are added to the price. However, when you attempt selling the same jewelry back the jeweler only buys it below the market price deducting the making charges.

2. Investment in Gold Coins and Bars

This option is comparatively better than buying jewelry. These are also bought from the jeweler but unlike jewelry, they do not include heavy making charges. It is always better to buy gold coins from jewelers rather than banks because banks don’t buy the coins whereas the jewelers do.

3. Gold Exchange Traded Fund

Gold ETF or Exchange Trade Fund is basically a type of mutual fund. This mutual fund, in turn, invests in gold and the stock exchange lists the units of this mutual fund scheme. You can buy ETF’s from the stock exchange by creating a demat account. You also have to open a trading account and pay brokerage and management charges to buy ETF’s.

4. Gold Fund of Funds

It is a type of fund which invests in ETF’s on your behalf. But for this type of investment does not require a demat account to be opened. Still, it is a little expensive as annual management charges need to be paid. Through these funds, it is possible to make a SIP investment in gold.

5. Equity-based Gold Funds

These funds don’t directly relate to investing in gold but rather investing in the companies that mine, extract and market gold.

6. Gold Futures

They are traded and bought on MCX commodity exchanges. The contracts are settled before a pre-determined period and these future prices tend to track gold prices. They are a risky investment because the contract has to be settled even if losses are incurred. The plus side of investing in gold in the futures market is that only a ten percent margin has to be paid.

Best Time to Invest in Gold:

There is no wrong or a right time to start with gold as an investment. It is better it invest in gold for a long period of time to average out the cost of purchase. To make things simpler, understanding the trend by checking the rates of gold online on regular basis is very important. Fundamental analysis can be done i.e. the macroeconomic situation (GDP growths, interest rates, inflation, productivity, etc.) can be analyzed. Also, the performance of gold can be compared to the stocks.

Nitin Agrawal
Nitin Agrawal
nitin@orowealth.com

Nitin is the Co-founder and CEO at Orowealth and has worked at Deutsche Bank for 6 years in Equity Structuring across their London and Singapore offices. He is a MBA from IIM Bangalore and has a degree in Electrical Engineering from IIT Bombay.

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