Indians have always had an emotional link with gold. The precious metal is purchased at every important life event from the celebration of the birth of a child to weddings. While such purchases are made with a sense of financial security in mind, the metal, in its physical form, cannot be efficiently used to make a cash profit.
Disadvantages of investing in physical gold
Just to clarify, by "investing" we mean buying an asset for making a profit by selling it in the future, after it appreciates in value. Physical gold could be purchased for sentimental value but there are some drawbacks when it comes to buying for investment purposes.
- It needs a safe storage facility to protect it against theft.
- You cannot buy physical gold in the purest form. Jewellery is only 91.6 percent pure gold as the metal is soft in its purest form and needs to be mixed with silver or copper to make it harder. The closest you can come to pure gold would be 24KT coins (which is 999.9 parts per thousand gold).
- If you buy gold coins from banks, you will pay more than the market rate. A bigger disadvantage is that you cannot sell it back to the banks as they are not allowed to buy back coins.
- In most cases, jewellers do not accept jewellery, coins or any form of physical gold in exchange for cash. You will have to melt the metal and purchase gold in exchange. This means that you may be stuck with physical gold and not make a cash profit out of it despite the appreciation in value.
- When you sell jewellery, you lose on making charges, melting charges, etc.
- It is a passive form of income asset. You cannot earn any regular income from it.
- Its is not highly liquid, which means you cannot easily sell it for cash for immediate needs.
Movement of gold prices
In theory, gold's value is linked to its simplicity. It is valuable because it is a scarce metal with durable quality and recognised for its value all around the world. However, many fail to understand how the stock markets and geopolitical events dictate the international rates of the precious metal and even more unclear on how those international rates set the base for gold prices in India.
This year, the price of the precious metal soared to new highs due to the uncertainty brought by COVID-19 worldwide, but this could drop when the global economy gets back in shape, which means that those looking for profit bookings need to act fast.
If you wish to make the most of the price movement in gold, you need to buy it in the most liquid forms- which is not physical gold. Your options could be:
1. Gold ETFs
Gold ETF is a great way of owning gold on paper. It is as easy as buying stocks of companies, readily exchangeable for cash. The purchase and sale can be done using your trading account. You can buy and sell during market hours within the comfort of your home.
There isn't much to think on the choice of gold ETFs in India as all of them have gold as the underlying asset and returns will be almost similar. You could pick an ETF based on expense ratio and other costs, convenience and reputation of the asset management company.
As mentioned before, gold ETFs are like stocks, therefore the movement in their rates, on some days, can be as volatile as stocks. However, since you have the advantage of exiting from the investment at any time, you will be able to decide on the right time to sell and act fast.
2. Gold futures
The biggest advantage and also biggest risk is that futures offer great leverage, which means that you can own a lot of gold futures for less money.
It works like futures trade in any commodity. Though one can take physical delivery of gold, what motivates traders to use futures is that they can speculate on the price of gold (rising or falling) and make a lot of money, very fast. However, it is with the same speed that you can lose money that you did not even have and end up in debt.
In general, the futures market is for sophisticated investors, and also requires access to futures trading which is a service that not all brokers provide.
3. Investing in gold mining stocks
Just as the movement of crude oil price impacts share prices of oil refiners/marketers, the changes in gold prices impact shares of gold mining companies.
If gold prices rise, the miner's profit will rise. Its revenue will also go up if production is increased. A double whammy.
However, like any equity investment, especially individual stocks, there is high volatility and risks associated with the company's management. More importantly, India does not really have such stocks. You may have to invest in global markets as most precious metal mining companies are listed across Canada, the US, Australia and the UK.
Your alternative in India would be to invest feeder funds (like mutual funds) for example- the DSP World Gold Fund that invests mainly in BlackRock Global Funds - World Gold Fund.
Gold investment is not as simple as it looks. Price movements of the metal are associated with multiple factors. Rupee's value, US dollar's movement, inflation, interest rates of central banks around the world, political conflicts, economic tensions, and more impact its movement, which could get hard to keep a track of.
It is, therefore, advised to not put more than 10 percent of your total investments on the precious metal.
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.