I would suggest a mix model for gold investment i.e Buying a far month gold in commodity exchange(MCX) in combination with a bank fixed deposit.
How it works?
This model works well for an investor who has a sure plan to buy a fix amount of gold in a future date. We can understand this with the help of an example:
Suppose an investor wants to buy one kg gold in 10 years hence at gold"s current price of Rs. 26,000/10 grams, he has to spare Rs 26 Lac, which would certainly go up if purchased in next few years. In my investment model, I would suggest an investor to invest an amount of Rs 10 Lac.
However, while buying it in MCX, he has to pay a margin money of Rs 1 Lac only. I suggest investors to put Rs. Two Lac excess margin to cover downside risk and Rs 7 Lac in two parts as a fixed deposit at an interest rate of 10.5% per annum.
Suppose Gold"s price fall more than 2000 points then an investor can use its FD to pay for the MTM margin. Looking at gold's past record and its future outlook in next 10 years, it is looking forward to appreciate much more.
Suppose gold price escalates significantly from here, then an investor can take out make an additional fix deposit. This model provides capital appreciation and interest on investment both at the same time.
Suppose in 10 years the gold price reaches around Rs 50,000, then the investor can square off his position and take out the money from mcx i.e. approx. Rs 3 Lac, and also break the initial FD of Rs 7 Lac as well as MTM FD of Rs 24 Lac ((50000-24000)x100) with an approx maturity of Rs 15 Lac and Rs 35 Lac respectively. Hence total amount receivable after 10 years would be Rs 53 Lac. Considering contract premium and trading expenses for 10 years to be Rs 2 Lac, net income comes to Rs 53 Lac- 2 Lac = Rs 51 Lac.
Similarly same model can be implemented for investors who want to buy 100gms of gold or more for any desired time horizon.
This model has some other benefits also. It requires only 40% of underlying product's value and even if the price of gold does not increases as desired by the investor, still he can earn interest on the part of his investment. Investor can utilize the FD amount to create liquidity by an overdraft facility in case of urgency.
This model has some limitations such as timely conversion of gold contracts before it expires to the next contract, extra payment of premium during conversion of contract and uncertainty in the price movement of gold in the future. However, these limitations can be easily overcome by prompt monitoring and strict discipline.
This investment model is suitable for all such investors who are sure of buying certain quantity of gold in the future irrespective of its price being on the higher or lower side.