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Should you invest in gold?
In the latest Investors' Hangout, Dhirendra Kumar discusses why gold has suddenly zoomed, if it should be considered an investment, and the different ways of buying gold
Oct 12, 2019
Dhirendra, I am a little curious to know the reason behind such a high yield in gold over the last one year. What is it?
Dhirendra: It is not exactly one year. Gold has zoomed over the last three to four months. It makes a periodic comeback and makes a big one. But don't lose perspective. Look at three- and five-year returns. It is only around 5.5 to 6.5 per cent. Even if you look at the 10-year return, it is only around 8 per cent. And this is after taking into account the recent and the earlier big jumps which we have seen.
People have a traditional view that gold is something which is bankable. It is believed to be the king of bad times. There is a belief that it is an investment for bad times and comes in handy. And so it did. For example, during partition in 1947, anyone who could carry gold with him was much wealthier and more secure than someone who couldn't. They couldn't carry any other asset. But those times are gone. It has a limited role in a modern economic framework.
And the kind of uncertainties we now see - the U.S. China trade war, apprehensions about oil supplies and so on - all of this led to turmoil in the financial market and so gold went up. It rises whenever there is uncertainty in the market. And when things settle down, the prices come down.
Given the long-term returns, I have my reservations about considering it as an investment. My view is that gold is something to be had. It is for consumption. Just feel happy about the jewellery you have or about showing it off to people.
So should one invest in gold?
Dhirendra: No. It is an unproductive asset. When you buy equity, you become an owner of a company and are entitled to all the benefits and cash flows. The changes are reflected in the stock price. Similarly, when you become a lender, whether by investing in a corporate bond or post-office scheme, you are entitled to the principal repayment and the interest. Also, when you buy a house, you either save on the rent or generate it. But gold just sits there. It doesn't work. And if you have too much of it, you will have to spend money to make sure that you still have it, to keep it securely. So it's not a productive asset.
However, gold acts as a good collateral and is probably the oldest repository of value. But if we talk about returns, they are low over the long term. One should not consider it as a part of a portfolio. Consider it only for consumption and feel happy about it. Maybe you can have some small allocation for emergencies.
What are the different ways of buying gold if someone still wants to buy it?
Dhirendra: If you are still a gold fanatic, there are multiple ways of buying it. One is Gold ETF. You open a brokerage account, go to Gold ETF and buy the units. Its price moves in tandem with the price of gold, less the annual expenses. But opening a demat account and then buying gold through the trading session is a slightly complex procedure. It is difficult for many people. So to overcome these complexities, and to make it more convenient, there are gold mutual funds in which you put the money and that money gets invested in Gold ETFs by the fund company. It is an overlay. The only investment of these funds is buying physical gold which is kept in the locker and valued everyday.
Alternatively, if you buy gold jewellery or coins in the traditional way, first you will have to worry about storing it securely, and second, whenever you sell them there could be high transactional costs. With jewellery, as much as 20 per cent could be deducted because of making charges. Whereas gold ETFs and funds have a nominal expense ratio of half to one-and-a-half per cent.
Then there is an interesting option which is available only in India and nowhere else, that is Sovereign Gold Bonds (SGBs). SGBs are by far the best option to buy gold. They are issued by the Government of India and have an eight-year investment time frame. In addition to the appreciation in gold price, you get a guaranteed interest of 2.5 per cent per annum. Also, on maturity, the capital gains are exempt from taxes. And if you are looking for liquidity in the interim, they are also traded on the stock exchange.
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