The 1969 film, Mackenna’s Gold, was a fictionalized account of how the quest for gold can affect lives. 50 years on, the yellow metal hasn’t lost any of its sheen. It continues to lure people into its preciously woven web of value. The conundrum – Is gold really a wise investment avenue? Or is it foolish to get caught in its trap? Today, we’ll mine for answers to these questions, and look at gold through a different lens.
Going Back in Time
Back in the day, having physical gold was akin to having an emergency fund. Within the last century, there have been two world wars and hundreds of battles fought across the globe. India has witnessed the Partition of 1947 as well as the war with Pakistan in 1971. During these times of war, people had to either remain trapped in their homes or flee immediately, without getting a chance to gather funds from a bank or money lender. If they had gold with them at home, in the form of coins or jewellery, they’d be better off. They would just carry all the gold they had on them, and rebuild their lives with it.
Gold used to be the go-to asset in case of any emergencies, one of the most dependable assets to own. Further, in the olden days, parents would transfer property to their sons, and gold or “stree-dhan” to their daughters. Times have been changing, and the economy has been growing over the years. These archaic views of gold are shifting. In today’s day and age, investing in gold the old-fashioned way has its limitations.
Drawbacks of investing in traditional forms of Gold
Storage Costs
Physical gold, be it in the form of jewellery or coins or bars, needs to be kept safely. Bank lockers don’t come free, and leaving gold lying in the house does involve some element of risk.
Lack of Transparency and Liquidity
Selling physical gold isn’t as easy as selling units of a mutual fund or equity shares of companies. Moreover, with jewellery and coins/bars, there are a lot of hidden charges involved, both at the time of buying as well as when selling. Making charges of jewellery, taxes paid on purchase of coins and bars, and the question of purity, all lead to some amount of uncertainty in the price.
Owning some physical gold is okay if you like dressing up for occasions, but treating this as a dual-purpose asset would be flawed. Adornments are one thing, investments a whole other. New age ways of investing in gold overcome the limitations of traditional gold, and are better suited if you want to make them part of your investment portfolio.
Modern modes of investing in Gold
Gold ETFs (Exchange Traded Funds)
This form of investment in gold is offered by mutual funds. ETFs are traded on the stock exchange, similar to shares. It’s the most liquid way to invest in gold. ETFs are particularly good if you’re considering a short to medium term investment in gold. Any gains made on the sale of these funds are taxable as per the prevailing Income Tax laws.
Sovereign Gold Bonds
These are securities issued by the government, denominated in grams of gold. One can buy a minimum of 1 gram and maximum of 4 kilograms of gold in one financial year. In addition to any rise in gold prices, you also earn a 2.5% interest on your investment. Moreover, the gains on sale of these bonds are exempted from tax.
Sovereign Gold Bonds (SGBs) are usually issued 6-7 times a year, and have a fixed maturity period of 8 years. One may sell the bonds before the end of the maturity period as well, because they too are listed on the stock exchange. However, owing to lesser number of buyers and sellers, ETFs are easier to sell than SGBs. For the longer term though, these gold bonds offer much higher returns and outperform their exchange traded counterparts.
Digital Gold
The latest entrant to this new-age list is digital gold. Now, with an investment as low as ₹1, we can buy gold through platforms such as Paytm, Amazon Pay and a few stockbrokers. An equivalent amount of physical gold is kept in a vault in the buyer’s name, which can be sold in the future. Digital gold is not regulated yet, unlike ETFs and bonds that are regulated by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), respectively. While this avenue might seem attractive, the novelty of it makes it highly risky.
All that glitters is not gold
Historically, gold prices have been fraught with uncertainty. The ups and downs are not based on any logical factor. Usually, when there is uncertainty in the market, gold prices go up. This is because people become wary of the market and buy gold as security. The result? Volatility in returns as well.
There can be long periods of low returns, and short spurts of high returns. Due to the uncertainty around the pandemic, this year has seen a 54% return on gold. However, over the last 30 years, the return has ranged between 5-10%. Doesn’t sound as glittery now, does it?
In India, when it comes to festivals and weddings, this glittery yellow metal holds a big place in people’s homes and hearts. Let’s set this material view of gold aside when considering it as an investment option. Know why you want to invest in gold. If it is so that all your money isn’t only in one or two assets, great. If your reason is to earn a quick buck seeing the year 2020’s returns, or because of the myth that gold is the most valuable asset there is to own, I hope this exploration has given you enough food for thought.
Physical gold must not be considered an investment. And as for all the other forms, know the pros and cons. As the Preacher in Mackenna’s Gold says of gold,
It can work for the Lord as well as the Devil.
