Is It Safe To Invest In Gold? Information To Help You Decide
Gold, a metal that has proved to be worth more in value throughout human civilization. It can be used for multiple purposes. Throughout the centuries we have seen people using it as jewelry, ornaments, currency, etc. To date, we can see the governments keeping gold reserves to print currencies as per the international requirements. People also invest in gold for appreciating their capital. It is considered one of the safest investment options by many. But is it really safe to invest in Gold?
In this blog post, I will cover the basic information about why gold is considered valuable. How its price is determined. Different variants through which you can invest in gold. Lastly a comparison with the stock market and term deposit interest rates before suggesting who should invest in gold.
Here Are The Important Things To Know Before You Invest In Gold:
Why Gold Is Valuable?
The reason why gold is considered valuable because it is a common notion. Moreover, even if gold as a natural mineral is available in ample quantity, extracting the same is not so easy. This leads to the scarcity of gold. And in general, anything which is scarce in nature is considered valuable.
In addition to that, gold has multipurpose uses. It can be transformed into various shapes and forms. It does not rust and hence the ornaments made from it can be transferred from generation to generation. Due to the characteristics and atomic structure of gold, it is highly used in some important machines.
From an international standpoint, governments have to keep gold reserves to print currency. We have seen through many movies and TV shows (Money Heist recently famous show) how the gold reserves are maintained. Along with that, it can be traded as a universal commodity to pay off foreign debts.
Therefore, from civilization, cultural influence, and international importance, gold is considered to be valuable. There are other metals like silver, copper, platinum, etc. which are also available. But somehow gold supersedes them in value because of the mentioned factors.
How Are The Gold Prices Decided?
Gold prices are decided similarly to any other commodity. The price is determined by taking into consideration the demand and supply. If the overall demand for gold rises but due to any reason if the supply is not available then the prices are likely to rise. Throughout the years the gold prices have risen in general and therefore it is considered for investment purposes.
At an international level, the price also gets fluctuated by various factors like government regulations, crude oil prices, futures contracts, etc. But how do oil prices influence gold prices? Gold is not naturally available in its best form just like diamonds. To extract gold in its raw form, the mining and extraction companies use many heavy-duty tools. Generally, oil and petroleum products play a vital in operating those machineries. If the oil prices rise, they lead to an increase in cost for extraction finally leading to an increase in gold prices.
In India, where we have many festivals and gold articles are considered auspicious during marriage ceremonies. So, generally, people expect the prices to go up during those festivals and marriage ceremony seasons. But throughout my experience, I have observed that it is seldom true. The international price of gold is generally not influenced by these festivals and seasons.
Ornaments Vs. Investment
As I mentioned, gold can be transformed into many shapes and forms. You can make a chain, ring, earrings, bracelets, etc. So when it comes to investment purpose what should one choose? Whether one should buy ornaments or go for the gold bricks, biscuits, coins? In order to understand that we need to understand the purity of gold.
When gold is transformed into ornaments, generally other metals are infused with it to increase the strength of those ornaments. This leads to a reduction in the purity of gold. This purity is expressed in the unit called ‘Carat’ or ‘Karat’. 24 Carat gold is considered the purest form of gold. Some of the ornaments are made of 14 Carat (14kt), 18 Carat (18kt), 22 Carat (22kt), etc. Very few ornaments can be made out of 24 Carat Gold. These generally do not have fancy designs and lose their sturdiness if pressure is applied.
Why is it important to know about purity? Because if you are planning to invest in gold and want to sell the same when the prices rise then buying 24 Carat gold ornaments makes sense as you will get the full value. If you try to sell 18 Carat gold then the price will be lesser. Whereas if you want to buy gold for other than investment purposes then you can buy fancy ornaments.
Making changes is also something that differs from seller to seller and hence it can also bring down the overall value of the gold in the ornament while selling.
Sovereign Gold Bonds And Other Gold Instruments
If you want to invest in gold, then is buying a physical commodity the only option? No, there are many other options available. These might differ from country to country. In India, we have Sovereign Gold Bonds (SGB) which carry a certain fixed rate of interest, a fixed lock-in period, and a tax-free form of investment. The SGB is issued by the Reserve Bank of India (RBI).
Apart from the SGB, there are mutual funds that invest in gold. These offer a facility to invest the amount as lump-sum or on monthly basis (SIP). These have a lower locked-in duration than SGB and the performance differs from fund to fund. But these can be opted-in to avoid safety and security issues that come with physical gold. Moreover these help in avoiding making charges and purity issues.
Another investment instrument is Gold Futures which is considered to be highly complex and risky in nature. It requires in-depth knowledge of the stock markets, international macroeconomic factors, and policies concerning leverage. Generally, an investor needs to have a Demat account for this whereas it is not required in the case of mutual funds. Therefore, if you do not understand the working of futures contracts then it is wise to stay away from the same.
Physical Vs. Digital Gold
From the previous explanation, we understand that we can buy physical gold as well as non-physical mode. What is more convenient? This can be subjective from person to person. Some people might be hesitant to trust the online portals and non-physical forms and may prefer the physical form only.
There are pros and cons of both. When it comes to the physical form of gold even though there is no wear and tear, one needs to keep them safe. The gold articles always come with a fear of theft. To avoid this, one might need to get safety deposit boxes offered by banks. But then accessibility becomes a challenge. If the bank is closed then you cannot access it till the bank opens. Along with that, the physical form of gold may be subject to GST, making charges, other miscellaneous charges which increase the cost of accumulation. This can be as high as 25% of the total value of gold. So when you are planning to sell the article you are getting only 75% of the billed amount.
When it comes to the digital or non-physical forms of gold, one finds it difficult to trust the system. The portal is prone to cyberattacks, the platform which is offering the facility may cease to exist, and trading of the same can become difficult. Some of the people who prefer to invest in gold by making cash transactions will not be inclined toward a digital form of gold. This is somehow a shady way that is discouraged by the government.
Depending on what kind of investor you are, you can choose any form to invest in gold.
Returns On Gold Vs. Other Investment Instruments
Before making a final decision whether to invest or not to invest in gold, one needs to look at the historical performance. It is completely logical to assess the historical results of the investment instrument before investing. It helps in estimating the likely returns as well as give a rough idea about the trend. To go even one step further, one can look at the historical returns of other investment instruments and compare them to choose the most suitable option.
Therefore, I have gathered yearly data pertaining to gold prices, NIFTY index, and Interest rates on term deposits from the year 2000 to 2020. The gold prices are expressed in Indian Rupees (INR) per gram. You can check the source of that data to find the prices in your currency. The NIFTY is one of the leading stock indexes in India. It comprises 50 companies listed on the National Stock Exchange (NSE). And the interest rates on term deposits are issued by the RBI. For the data presentation purpose, I limited the scope of term deposit interest rates on a 1-year basis.
As you can observe from the graphs, the gold prices have grown significantly when the stock markets were down.
To put it into perspective, if I had invested 1000 Rupees (each) in the year 2000 for buying Gold and units of Index funds; I would have got approx. 2.5 grams (INR 403 per gram) of gold and 0.65 units (INR 1523 per unit) of Index funds. Their value in the year 2020 would have been 10545 (INR 4218 x 2.5 grams) and 7588 (INR 11675 x 0.65 units) respectively. Therefore gold would have given better appreciation on the invested value.
Should You Invest In Gold?
Lastly, the big question, should you invest in gold? The answer would be subject to whether you have made clear choices about the form, purity, and purpose of investing in gold. Depending on which country you are residing in and the price of gold you may have to spend a decent amount of money to invest in gold. If you have the sum available with you then you can decide to invest in gold.
I am the type of person who still believes in investing in the physical form of gold rather than digital or other forms of instruments. From an investment perspective, I prefer to buy 24 Carat rings, coins, etc. which can be traded for the complete weight of the gold and which are in their purest form. I do not prefer locking the money in a bond or depending on the digital platforms which offer gold equivalent assets. One of the reasons for that is the physical gold’s acceptability. Certain lenders may or may not agree to provide value for the non-physical forms of gold which eventually defeats the purpose of investment. Moreover, I prefer to invest in gold as it gives another opportunity to diversify my investments.
So if you want to have a highly liquid form of investment available with you then you can choose to invest in physical gold. If you want to make the investment for tax-saving purpose then there are better alternatives which can provide better long term returns than gold. And if you are completely inclined towards a higher rate of returns without worrying about the risks then you should not invest in gold and choose other investment options.