Gold and its importance in Indian context:
India’s obsession with gold goes a long way back in the history. In fact, gold has a rich tradition in Hindu mythology as well. In Ramayana, King Ravan’s island fortress capital, Lanka, was made up of gold. In the legend of Lord Krishna, the entire city of Dwarika was also made up of gold. Chanakya, the pioneer of the subjects such as economics and politics, has said, “Sarve gunaaha kaanchanamaa shrayante”, which means gold has all the qualities that can give you a better life and the more you have it, the richer and more accomplished you are. In Ayurveda, too, gold has been given a lot of significance. Gold ash powder is developed and produced as special remedy for a number of diseases and disorders.
Research shows that over 16,000 tonnes of gold is there in Indian households predominantly in the form of jewellery. The value of this as per market price is a whooping Rs. 27.2 lakh crore. That is close to twice the foreign exchange reserves held by the RBI. Let’s consider the factors one needs to be aware of and the know-how of investing in gold.
Gold has proved itself time and again to be the perfect hedge for inflation. But to look at it as a hedge avenue, Indians are yet to consider this market actively as the purchases continue to be dominated by jewellery. Gold only beats inflation. It fares poorly when compared to real estate or shares when compared on the basis of real inflation adjusted returns.
Any serious investor, however, is advised to have a certain percentage of investment in gold to hedge inflation.
Forms of buying gold
Any investor has to be aware of the different forms of buying gold. Jewellery, the most traditional and the dominant form of buying gold in India, is in fact not an investment idea. The reason is that there are heavy losses in the form of wastage and making charges. This can vary from a minimum of 10 per cent to as high as 35 per cent for special and complex designs.
Bank coins, again, are not an investment idea as the premium that banks charge for their coins is around 5-10 per cent. Also, the bank coins have lesser liquidity as they are not bought back by the banks.
Bullion bars are good modes for investment but the minimum investment here is much higher than a common investor can think of.
Gold Exchange Traded Funds (ETFs) are a hot option these days. These are like mutual funds that invest only in gold. They are proving to be an easier and safer mode to buy gold. The charges are very less and the gold can be accessed electronically. The disadvantage is that one never gets to “see” one’s holdings.
Gold in any form does not give any current income. The only exception is the dividend option in the gold ETFs. If held in the physical form, there is only outflow of cash for the maintenance of lockers.
Historically, gold has been the perfect hedge for inflation. This is based on data from the year 1800 AD. But in terms of absolute returns gold has fared rather poorly giving returns at only 0.8 per cent above inflation. Real estate and shares beat gold squarely on the capital appreciation front. Real estate and shares have given returns of about 11 per cent over inflation since 1979 (1979 as that was the year the Sensex was launches).In the short run, however, gold is a very strong bet compared to shares that are highly volatile. The idea for gold investment will be to use it at times when the markets are falling and when the inflation is very high.
A 5 per cent of the overall investment portfolio can be considered for gold investments (bullion, WGC coins, Gold ETFs). Jewellery is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolizing wealth.
Gold does not carry much risk at least in India, as we hardly see deflation in the real sense. Even when the official figures where showing negative inflation (deflation) during the last year, the actual prices of food items were increasing. This was reflected in the gold prices too. The real risk with buying gold is in the opportunity cost of investing in other avenues that can actually give higher returns. The average return in 2012 was 7.5 %.
Your objective should to be to buy gold on a continual basis. This is because your gold consumption is continual- you may, for instance, choose to gift gold to your family during several festive occasions. Given the continual need for gold, you should not be concerned about the changes in its price levels. Instead, you should set-up a systematic plan on gold ETF. Your investment should preferably be 10 per cent or less of your total portfolio value.
Buy but not in huge quantities at one go. Buy in small quantities and buy ETFs. I think this is the right time to start investing in gold and chances of pricing coming down are looks mean. At the same time it shouldn’t be more than 5% to 6% of your total investment. I generally buy gold but not for investment purpose but for traditional reasons Indians buy gold.