Gold Investment: Pros and Cons of Gold Investment
Gold has become a part of every human culture. Its natural beauty, luster, great malleability and resistance to tarnish made it popular and precious metal. Lets read about pros and cons of gold investment below.
Gold, beauty, and power have always gone together. Gold has always been the powerful thing. Early civilizations equated gold with gods and rulers. The first use of gold as money occurred in 700 B.C.
In India, gold is given to bride as it is considered as signal of good luck. Gold has rich history in India. Gold is also considered as safest option for investment in India. Why? Because,
- First reason is, investor finds it safest option as it has always given good return.
- Second reason is, gold can retain its value better during inflation as compared to other assets.
Investing in Gold
- Investor can buy physical gold in the form of coins, bullions, artifacts or jewellery.
- Investor can buy paper gold through gold ETFs (Exchange Traded Funds) or gold mutual funds, sovereign gold bonds.
Reasons to invest in gold | Pros of gold investment
- Hedge against inflation: When inflation rises, value of currency goes down so investors keep cash in the form of gold. Therefore, in times when inflation remains high over a longer period, gold becomes a tool to hedge against inflationary conditions. So, this pushes gold prices higher in the inflationary period.
- Simple and easy to liquidate: In history, gold was used as currency. It has the most long-term value as compared to any other currency. Digital gold is easy to buy and sell. Just simple few clicks. People also use gold as backup. So, during any financial crisis they sell gold as its easy to sell gold. And you can sell physical gold in parts. But return is as per market rate and purity of gold in case of physical gold jewellery.
- Tangible asset: Purchasing gold is much easier than other assets like real estate.
- Value of gold: In India, people buy gold jewellery and pass it to next generation as it is the symbol of wealth. Following table shows the value of gold in 70 years. In 1950, price of 10 gram gold was Rs 99 and in 2020, its Rs 48651.
| Year | Price per 10 GM |
|---|---|
| 1950 | Rs 99 |
| 1960 | Rs 111 |
| 1970 | Rs 184 |
| 1980 | Rs 1300 |
| 1990 | Rs 3200 |
| 2000 | Rs 4400 |
| 2010 | Rs 18000 |
| 2020 | Rs 48651 |
- Portfolio diversification: It’s believed that equity and gold have inverse correlation. So, when the price of equity goes down, price of gold rises. So, investor use gold for portfolio diversification as gold reduces risk.
- Easy to get loan: For any emergency situation and when investor doesn’t want to sell gold jewellery, it’s easy to take loan against gold ornaments. Bank gives secured loan against gold and interest rate is also not that high.
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How can you invest in gold?
Following are the gold investment options available:
- Physical gold: In India, people buy gold jewellery in marriage. When investor buys gold jewellery or coins or bullion, it becomes an investment. But when investor sells jewellery, the rate is not the same as one has to pay making charges to buy jewellery and purity is also the issue. So, buying coin or bar is better option if anyone is buying for investment purpose.
- Gold ETF: Gold ETF invest in physical gold or stocks of companies engaged in gold mining/refining. Investment in Gold ETFs can be made only in a dematerialized form so its mandatory to have demat account. Investor needs to pay brokerage fees.
- Gold Fund: Gold Fund primarily invest in Gold ETFs as an underline asset. Thus, a portfolio of that ETF becomes an underlying asset for the scheme. The difference between Gold Fund and ETF is demat account and SIP. To invest in gold fund, investor doesn’t need to have demat account as it’s a type of mutual fund. And, you can opt for Systematic Investment Plan (SIP) in case of gold fund but for gold ETF, SIP option is not available.
- Sovereign gold bonds (SGB): Sovereign gold bonds (SGB) are issued by the government on a regular basis which may also be bought. SGB comes with a maturity period of eight years and the lock-in ends from the 5th year.
Cons of gold investment
- Return is less when you sell jewellery. For jewellery, one has to pay making charges so when while buying new jewellery. When he goes to sell it, he gets money according to purity of the gold. So, making charges and impurity is overhead.
- There is always risk of theft when you keep physical gold. Its secured to invest in Gold ETFs and Gold Fund as those are not physical form of gold.
- One needs to pay cost to store large quantity of physical gold. And there is always doubt of purity in physical gold.
- Gold does not pay dividend or interest. When you buy a stock, you earn dividend or when you open a bank account, you received interest on your savings or real estate which may give you rental income.
- Gold can’t be income generating investment. Once its sold, its sold. It cant give you steady regular income which you may need after retirement.
TAKEAWAY:
So, we discussed history of gold and pros & cons of gold investment. Physical gold is a good option when you want to pass on wealth to next generation. Gold ETF and Gold Fund is a good option who wants safer option.
Gold is also a good option for portfolio diversification. So, investor can invest some amount of his investment in gold to reduce to risk.
