The reasons behind gold’s phenomenal rise as an investment option are really quite simple. When large parts of the world are teetering on the brink of financial disaster, the focus naturally turns to the one currency that is in limited supply. From virtually little noise five years back, gold is roaring back as an investment option. You don’t need to hire a financial planner to tell you that. Despite a recent price correction, investors remain eager to jump on the gold bandwagon.
The question everyone is asking is, does it make sense to enter the market at today’s rates? The standard advice from a bulk of advisors and portfolio managers remains the same: “Invest 5-10 per cent of your portfolio in gold or gold-related instruments in order to hedge against risks to other instruments.” Try telling that to people who have seen their investment in gold double in three years flat. But ask we must: will investing in gold now lead to great returns?
At best, financial advisors sound cautious on price. That’s hardly surprising. It’s difficult to predict where gold prices will be two quarters from now, leave alone a year from now. This is because gold prices are affected by several factors, including the movement of the dollar, crude oil, global economies, central bank purchases and so on. Frankly, retail participation doesn’t drive prices—that’s a game played by central bankers. “Like any other investment, investors should not attempt to time the market, especially in the case of such a volatile commodity,” warns a senior portfolio manager.
In the last five years, gold has definitely done enough to prove a worthy investment. Compared to other fixed income investments like public provident fund (PPF) and so on, investing in gold is definitely more risky even while it has higher returns. But despite current price levels, banks and bullion traders say there has been a huge interest in gold and gold-related instruments. “Gold is definitely not an asset class for the short term,” warns Tarun Bhatia, director, capital markets, crisil Research. “However, it’s a currency that everyone instinctively tends to move towards in times of volatility.”
Over a period of time, many financial advisors feel that returns on equity investments will outshine the returns on gold. “I think there are other asset classes that are better, that offer better returns. When you invest in stocks, you are investing in a (good) company that is actually manufacturing a product or service, you earn a dividend from that investment. With physical gold, you have to pay for holding that instrument and there are no regular returns on it either,” argues Parag Parikh of PPFAS.
Still, these days investing in gold through exchange-traded funds (ETFs)—which track the price of the commodity—are the rage. Assets under management for this instrument have grown almost 10 times in the last three years. It’s easy to invest in; low on costs; the pricing is transparent because the funds are listed; the instruments are liquid and easy to trade. There’s also a lot of interest in investments made in mutual funds which essentially invest in gold ETFs.
Most financial planners recommend these two instruments as the best ways for lay investors to invest in gold-related instruments. However, the cost of investing in mutual funds per se is higher because there’s the cost of the ETF as well as the management fee for the fund itself. “Gold is a very difficult market to understand right from how prices are determined to where prices are headed. Also, it’s extremely volatile. Retail investors are better suited to choose instruments that do not allow for worry on where prices are headed and instead invest systematically,” says Harsh Roongta of apnapaisa.com.
Often retail investors make the mistake of buying jewellery as an investment. “One should never confuse jewellery as an investment because of the costs of making, storage, insurance and so on negate any gains made from returns on that gold that is held. Jewellery should be treated as a final consumption product meant for ornamentation only,” says Suresh Sadagopan of Ladder7 Financial Advisories. Beyond a certain level, purchasing of gold in jewellery and bullion also has tax implications—wealth tax and capital gains tax when the gold is sold.
The other issue with investing directly through bullion in the form of gold coins, bars and biscuits is purity of the gold (unless it’s purchased from a reliable source, of course). It also comes with the hassle of storage and risk associated with hoarding precious commodities. And bullion doesn’t earn anything for the investor in the duration that it is held.
Given the complications with understanding how gold prices are determined globally, there is also a speculative element to gold investments. Although historically gold prices have never crashed, there are (minor) cyclical corrections that take place. The extraordinary interest in gold remains as long as the world economy is in chaos—once that settles, prices of this precious metal also stabilise and stay steady.
For the long-term investor, investing in gold is definitely not a necessary strategy. The current price of gold, or its recent trend, should not determine your decision to invest in the metal or related instruments. Unless one is extremely bearish on other instruments in the medium- to long-term, it doesn’t make sense to park huge funds in gold. Gold-related instruments are a possibility, but look at it as a way to diversify your portfolio. As always, choose wisely.