Principle 24. Gold – A must in your portfolio

Gold is the base of monetary systems around the world. It’s an asset that’s highly liquid, accepted everywhere and considered equivalent to cash.  It’s also one of the lesser volatile commodities traded internationally.

Gold is very effective in bringing solidity into your portfolio and reduces investment risk. In terms of returns, it’s not a very effective tool to bring short term profits. Gold gains in value over a period of time and hence, you will have to wait for some time (say 5-10 years or sometimes more than that) to see the real effect of gains.

How to invest in gold?

Gold can be bought in different ways. You have 7 options –

You can buy-

  • Gold jewellery
  • Bullion bars from jewelers that are part of the world gold council
  • Gold coins issued by various banks
  • Gold exchange traded funds
  • Equity based gold funds
  • E-Gold
  • Take positions in Gold futures and profit from the price movement.

The first three options are about buying gold physically. If you have bought Gold jewellery, we are sorry to say that it’s not a right move from the investment point of view because, you would have paid an additional of 5%-30% of it’s value as making charges depending upon the design and some money on precious stones used in them. These stones are valueless and do not appreciate unless it’s a piece of diamond. Making charges paid is also a waste of money. Banks charge around 5% premium for coins sold through them. Bullion bars /coins bought through WGC networked jewellers may be the better option here since; they generally sell gold for a 2% or 3% premium. So if you want to hold gold physically, it would be better to buy it from WGC networked jewellers since they are the cheapest option.

Now, physical holding of gold risky since it is prone to loss by theft / fire or such other accidents. To protect from such losses, you will have to insure it and that will be an additional annual cost to be incurred until you sell it off. The purity of gold sold by jewellers is an issue that’s hard to crack. Again, it may be impractical to store it physically beyond a certain limit and in the case of an emergency if you go to a jewellery to sell your gold, they might not accept it straight away.

After reading the above paragraph, if you think that storing gold physically is not practical, you have the last four options – Gold ETF, equity based gold funds, e-gold and futures positions in gold.

Gold ETF is nothing but mutual fund schemes that invest only in gold. One unit would roughly equal one gram of gold. These funds are managed by asset management houses. If you don’t want investment houses to get involved, you can directly purchase e-gold launched by the national spot exchange. In both the cases, you will be holding gold in electronic format – just like investment in stocks.All you need is a demat account.

One more category of electronic gold is equity based gold funds. Equity based gold fund are basically mutual fund schemes launched by asset management companies. They do not invest directly in gold (when fund houses launch direct investment in gold, they are called gold ETFs) instead, they invest in stocks of companies that are engaged in mining, extraction and trading of gold.

The last option – taking positions in gold futures – is a risky game. All the negatives and positives of derivative instruments are relevant here also. It’s would work if you can reasonably predict the price movement of gold in the short term. It’s basically speculation (or trading, if you want to call like that) and cannot be brought under the ‘investment’ category.

How much to invest?

As a general rule, around 10 % of your investment fund can be in gold.

Which is the best option?

The best option would be to hold gold in electronic form – through ETFs or through e-gold route. In the first option, the additional amount you have to pay is the brokerage charges plus annual fund management charges. In the second case, your annual holding cost is zero. In both the cases, you don’t have to worry about the security of gold since it is held in electronic form in your demat account and the rates quoted in the exchange is 99% at par with the international gold prices.

By definition of the income tax department, gold a capital asset. Any gains from investment in gold are treated as capital gains. In the case of ETFs, it is considered as a long term capital asset after one year and in the case of e-gold and physical gold, it is treated as a long term capital asset only after 3 years. The relevance of this is that, long term capital gains are taxed at special slab rates declared by the income tax department whereas, short term gains from gold ( in the case of gold ETFs, gains made by buying and selling ETF between 1-12 months and in the case of physical gold /e-gold, gains made by buying and selling it between 1-36 months) is taxed at normal tax rates.

So we think that the e-gold route would be the best. Gold ETF comes second.

What’s the risk of investing in gold?

Generally, gold is a safe investment. It beats inflation. The risk is that sometimes, especially in boom periods, you’ll find the performance of gold to be slower than other asset classes like equities and real estate. So, the real risk lies in the opportunity loss.

With this we sum up our  24th principle. Know that –

  • Gold is an insurance against inflation.
  • It’s a good investment, but not the best one since it’s a slow performer.
  • It brings stability to your portfolio
  • Jewellery is not a right form of investment as it’s cost  involves making charges and the purity of gold sold by local merchants are always questionable.
  • Physical gold are prone to theft or other losses. Gold kept in bank lockers are not safe since, the lockers of most banks are not insured and the bank is not responsible for your assets kept in lockers.
  • It’s a capital asset and hence any gain on gold would be taxable.
  • Paper gold or gold held in electronic form is the best way to invest in gold.

You may like these posts:

  1. What is a portfolio? What’s portfolio management?
  2. Principle 22. Diversify your investments.
  3. Principle 23. Valuation is the key to right investments.

10 Responses to “Principle 24. Gold – A must in your portfolio”

MPatel

November 3, 2012 at 12:28 am

Great Article!!

Dipen

November 16, 2012 at 7:24 pm

Hi Victor,
What is Mini Gold?
Can u plz add some topics on Dollar rupee relation & its effect on market?
Thank you

J Victor

November 17, 2012 at 11:06 pm

Mini gold are future contracts on the MCX. The size of the contract is 100 gms. Dollar rupee relation will be dealt in a separate post soon.

Ankyt

December 3, 2012 at 1:25 am

hmmm…

Sophia

January 10, 2013 at 3:37 pm

Thank you.

suhel

June 28, 2013 at 10:53 pm

hi victor,

how the gold is a investment?
is there any base (fundamentals) for increase in gold cost to have good return on capital invested?

J Victor

July 1, 2013 at 7:21 am

Hi,
You may wait for some more time as we expect the gold rates to ease further.

satyajit majhi

December 8, 2013 at 2:03 pm

Its a nice article. everything is explained from the ground level, which shows that the site is more towards visitors interest.. thanks again.. love to see many more things like this type researches..

Debraj

January 19, 2014 at 2:38 am

This website is fantastic for people who know so less on finance but want to do something with the money they have got. Simple words, nice explanations and hence very very easy to understand. Kudos to the author.

deepak

June 17, 2016 at 9:05 am

very good job done BOSS………

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