IF YOU OWN ONE OUNCE OF GOLD FOR AN ETERNITY, YOU STILL OWN ONE OUNCE OF GOLD AT ITS END ~ Warren Buffett
Despite this, 50 percent of gold related investments are in physical gold.
Over the precious 40 years gold has delivered a respectable CAGR of 8.48%.
But there other asset classes like Equity markets which have delivered superior returns over longer term. So, does it make sense to invest in gold?
Does the gold price vis-a-vis stock market have a correlation? Yes, there is a negative correlation. When the gold price goes up, the index underperforms. In this context, gold is often referred to as a safe heaven for investors. But when we refer to gold as ‘SAFE’ we are talking about safety with respect to what? Gold works as a safety cushion for investors against the stock market’s volatility. Due to the nature of returns from gold and the way in which gold vs Sensex behaves, it serves the purpose of protecting one’s portfolio during falls in the equity markets.
The price of the gold has fallen only 7 times on an year on year basis in last 40 years, even in terms of downside the maximum price of gold has fallen over a year is 14% which is a lot better than the BSE Sensex that has had an yearly fall of 14% or more on 7 different occasions.
From a risk perspective, gold is a lot less volatile as compared to equities, with the Volatility of gold being 12.2%, whereas of Sensex is 31.4%.
The chart, clearly shows how well gold performs when the stock markets are depressed or when there is some sort of financial calamity like what we saw in 1991-92, 2008-09, 2020, and again in 2023 when the economic climate is bit cloudy.
Gold, one of the most precious physical assets, not brightly impacted by market prices. Unfortunately, this works both ways, and gold prices do not rise even when the markets are soaring. Unlike stocks, the return on gold is largely dependent on price appreciation and is not an income-generating asset. Although gold and stocks are essential to creating a diversified portfolio, the ability of stocks to offer multi-bagger returns in the long term makes a startling difference between the two.
In this article, we will look at different products of gold that can be selected in case the investor wants to hedge their portfolio against potential financial risks.
Physical Gold-It is readily available you can buy it from neighborhoods jewellery store, in fact its estimated that Indian households have with them 25000 tons of Gold which is almost 12% of all the gold that has been pulled out since the start of mankind. The availability of physical gold is High, the minimum investment in physical gold Rs. 2000(0.25gms), the cost in the case of physical gold is design and making charges (7-12%) cost of storage (3-5%), GST (3%), Insurance (2-4%), Nevertheless, you should be aware of the benefits and drawbacks of each type of gold before making a decision. the cons in the case of physical gold is Storage and security cost, risk of theft, illiquidity.
Digital Gold- When it comes to financial products digital gold is distributed by most of the Fintech companies and is also available in many mobile apps example-phonepe. The cost in the case of digital gold is GST and spread cost which is around 3% each. The minimum investment can be made of Rs. 1, Further the cons of physical gold is eliminated by digital gold.
Gold ETF’s- It can be purchased from trading platforms and also from the mutual fund websites, the cost in the case of gold ETF’s is expense ratio of around 1% each year and brokerage of around 0.1%. The minimum investment can be made of Rs.50.
Sovereign Gold Bonds- It is little time bound as the RBI releases a new tranche every few months, these buying windows are open for 5 days and a list can be accessed from RBI website even if we miss these buying windows, we can invest in them from trading account as these bonds are tradeable on the stock exchange. In the case of SGB’s there is no expense ratio or additional costs, but it is not highly liquid compared to gold ETF also there is minimum 5 years maturity period.
So, which form of Gold should investors look at while investing in Gold? While investing in gold may not be the best investment options currently, investors may have gold in their portfolios as an insurance to safeguard them against any Black Swan event risk. From the above analysis sovereign gold bond is a good option to invest in gold. It doesn’t attract taxes if an investor holds it for the entire maturity period. There is virtually no key cost. Physical and digital gold have high buy-sell spread as a negative point. Thus, investors may allocate 5%-10% of their investments to gold as an insurance to their portfolios.
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The article is authored by Mr. Mayur Solanki from Team RichVik