EspressoLogy

Gold has had a glittering run this year. It began 2020 at a price of Rs 40,370 for 10 gm of 24k gold. On Aug 6, 2020, the price of gold touched a record high of Rs 58,050, a return of 43% in just seven months. Gold has since retreated a bit but is still above 55k.

So, what is driving the price of the metal? Will gold continue to shine? Is it a good time to invest in it? And what’s the best way to invest in gold for a retail investor?

The rise of gold

For ages, Indian families have invested in physical gold and turned to it in times of crises. With good reason. Gold has always been a “safe haven”. The metal truly shines in times of crises (wars, calamities, pandemics), when other assets like Equity and Real Estate take a beating.

In fact, the global economic uncertainty induced by the spread of COVID-19 is one of the primary reasons for gold’s dizzying run. The other reason, which is related to the first, is falling interest rates. Gold prices rise when interest rates fall because investments like fixed deposits become less attractive.

But the question for investors is: will gold continue to rise? Experts advise caution. Gold is a great addition to a portfolio and should be a part of your diversification strategy. But experts suggest that you limit gold to about 5-10% of your portfolio. If you don’t already own gold, you should consider investing in it in a staggered manner, much like an SIP, to mitigate your risk.

How to invest in gold?

If you have decided to take the plunge and invest in gold, should you head out to the friendly neighbourhood jeweller and pick up some gold jewellery or coins? That isn’t such a great idea if you are planning to buy gold as an investment. Here’s why:

• Price: When you resell physical gold, you are unlikely to get the full value, because jewellers will buy back at a price that is below the market rate and also deduct making charges (in the case of jewellery) and wastage charges.
• Purity: You can never be sure about the purity of the gold unless you buy from a trusted source like a bank. But banks won’t buy back the gold when it is time to sell – which leaves you with no option but to sell it, usually at a discount, to a jeweller.
• Safety: Storing physical gold securely is a hassle. Many households store their gold in a bank locker, which is an additional cost.
• GST: Physical gold attracts GST at 3%.

Two great alternatives are Gold ETFs and Sovereign Gold Bonds.

Gold Exchange Traded Funds (ETFs)

Gold ETFs are mutual fund schemes that aim to deliver returns in line with gold prices by investing in physical gold. You can buy or sell a gold ETF through your broker as easily as you trade a share. You can even buy Gold ETF units through a Systematic Investment Plan (SIP). Your gold ETF units are held in a demat account, so you don’t have to worry about storage and safety.

Sovereign Gold Bonds

Sovereign Gold Bonds (SGBs) are government-backed securities, whose price mirrors that of gold. It’s a paper substitute for physical gold and, in many ways, a superior way to add the yellow metal to your portfolio.

SGBs are issued in tranches and have a maturity of 8 years, but investors can redeem their bonds from the fifth year. If you would like to sell your holding before that, you can trade them on the Exchanges at a market-determined price through your broker just like you would sell shares.

Comparing physical gold to ETFs to SGBs