Gold as an Investment Option
Written on Tuesday, November 21, 2017
By Team Bajaj Capital
“Gold” as an Investment Option Broadly, there are four 'asset classes' or 'investment options' which are commonly used to construct a well-diversified investment portfolio. These are Debt, Equity, Real Estate and Gold. Out of these four, gold is most misunderstood and least discussed investment option.
In the Indian context, gold assumes greater importance due to social and cultural reasons. For centuries gold is synonymous with wealth, status, security, and protection. In traditional Indian families, gold is regularly purchased on various occasions and festivals like childbirth, marriage, wedding anniversary, birthday, Dhan Teras, Diwali, New Year, Akshya Tritiya and list is long and endless. Also, gifting of gold within family members from mothers to daughters, from mother-in-law to daughter-in-law, from parents to children and amongst brothers and sisters is considered auspicious and is an integral part of festivities and celebrations. As a result, most Indian families have acquired/invested a significant part of their savings in gold or gold ornaments.
Gold and its Wealth Creation Capability
Gold is an unproductive asset and its prices are largely determined by supply and demand and because supply is limited, its prices tend to rise over the years with growth in demand. However, the million dollar question is whether investment in gold results in long-term wealth creation? The answer is a disappointing “NO”. Gold has never helped anyone become wealthier as its prices seem to rise with inflation in the economy and not any higher. If we look at the long-term history of gold prices for last 50 years or so, it has at best-kept pace with inflation. In other words, gold helps you protect the value of your savings and not enhance it which has to be everyone's goal. Average inflation in the Indian economy in post-independence era has been in the range of 8 to 10% pa and price of gold have also moved up at the same pace. Interestingly, a research was conducted in the UK where prices of two items, namely, gold and apple were compared over a long period of five centuries i.e. 500 years. Strangely, it was concluded that one ounce of gold could be bartered with the same quantity of apple in kg in the 16th century as well as in the 21st century. It was established beyond doubt that gold catches up with inflation in the economy.
In the context of investments, two asset classes, namely, Equity and Real Estate have beaten gold handsomely when it comes to wealth creation possibilities of these popular investment options. Millions of people across the globe have created substantial wealth by carefully investing their savings in Equity and Real Estate as opposed to the popular choice of gold. It is pertinent to mention here that gold has some unique qualities. On a lighter note, it can be displayed and physically worn which can bring happiness, joy, and pride to some individuals as opposed to sharing certificates, mutual fund statements or property ownership papers which naturally cannot be displayed or worn on a day to day basis! Also, gold is most liquid amongst all asset classes as it can be easily exchanged with cash even on a Sunday afternoon by visiting a jewelry shop or a goldsmith who would happily accept physical gold and give cash in lieu of the same. Same is not true for financial investments or real estate investments.
Investment in Gold - Not More than 10% of Total Investment
It is not to advocate here that investment in gold should be avoided. As a thumb rule, not more than 10% of your total investments should be invested in gold or gold related instruments like Gold Mutual Fund or Gold ETF or Gold Bonds. Our estimate is that most families in India have enough quantity of gold and if a proper computation is done, most of them will have around 10% of financial investments in gold. In case actual investment in gold is less than 10%, the additional investment may be made but not in physical gold. A better option will be to invest in gold ETF or gold Bonds. Similarly, if the value of gold holdings is higher than 10% of total portfolio, there is no need to sell gold in a hurry. At least do not buy any further gold unless your total portfolio improves over the years and value of gold comes to near 10% of the same.
Post demonetization in November 2017, there is a visible shift in investment pattern amongst Indians from physical investments like Real Estate and Gold to financial investments like Mutual Funds and Bonds. This is a very healthy phenomenon and should augur well for the Indian economy in decades to come.