Thursday, 17 January 2013

Gold - My Precious....

My Precious... says Smeagol in J R R Tolkein’s Lord of the Rings, fully aware of his obsession to the ring, yet unable to control his temptation! We too are like the Gollum when it comes to our obsession to the yellow metal. Gold is very precious. The amount of importance we give to gold needs no new introduction. As we are learning to invest and become better investors and wealth creators, we need to look at this precious commodity in the correct perspective. We need to ask ourselves, is it really worth it?

We are more given to buying physical gold, in the form of jewellery, ornamentation, coins or other such. We may use this gold to tide over financial problems and turbulences (ve...ry rarely...!). Otherwise, the physical gold we buy remains as a locked-up asset, never to be used. The sentimental value we attach to physical gold is another deterrent when we need to use it to unlock its value.

Such a passive investment in gold neither grows in numbers nor in units. In order to cater to the increasing demand for gold we have to import it. This also costs the exchequer a lot. Moreover, by buying physical gold we are not doing any good to ourselves either. If we invest in economically efficient financial instruments instead, we will get better returns. Though India has a chance of becoming a USD4 trillion economy in the next 4 to 5 yrs, we are dependent temporarily on FIIs and other foreign investments for much needed capital inflow.

As has been discussed in our article on Economic Ecosystem, investing in economy like investment in stocks is a better option with good returns too.

As a commodity, the price of gold behaves opposite to other asset classes. If other asset classes weaken or there is depreciation in domestic currency value, gold plays a supportive role. Price of gold generally runs opposite to the equity markets.

Historically, It is proven that equity gives more returns compared to gold.Thus, seasoned investors use gold as a hedging tool. Nothing more. We point out some disadvantages of buying physical gold :

  • The quantity is fixed. Doesn’t change with time.
  • Price doesn’t follow any benchmark.
  • It is a locked-up capital. Doesn't help in the fundamental economy of the country in any way. Moreover it is the biggest contributor to the present high current account deficit situation in India. For more explanation on this read our post Current Account Deficit - How it Affects India's Economy.
  • Physical possession of gold also attracts capital gains tax.
  • In the last two decades gold has given a return of 6 to 7 times whereas any good mutual fund would have given an average return of 16 times.
  • Gold may give returns to nullify inflation or marginally beat inflation but is not a wealth creator.

So, what to do with gold? Should we just leave it like that?
The answer lies in investing in gold, but in an efficient way. Learn to invest in a way, which unlocks the true value of the commodity overtime.

  • Invest in E-Gold or Gold ETF.
  • While you are in your earning years, invest in productive asset like equity, which grows in value and in numbers.
  • Use Gold investments (ETF or E-Gold) as a hedge only. Don’t overdo your investments in gold.
  • Participate in the economic ecosystem and become wealthy by making efficient investments.

Learn to invest better and invest wisely to gain fruitful returns.