Investment In Gold - Not As Glittery As It Looks


To say Indians love gold is an understatement. Indians are obsessed with gold. From checking the price of gold every day to buying gold whenever the rates drop, Indians have certain fixation towards owning gold. Owning gold in a form of jewellery is considered a matter of pride. More you have it, wealthier you will be considered. The gold jewellery, without a doubt, is an asset, but when people start looking at gold as an investment medium, they restrict the growth potential of their capital. You may ask, isn't gold a good investment? Let's say it's not the best of the investment and in sometimes, it's a flat-out bad investment.

Let's understand what investment in gold has to offer.

Before we dissect the investment potential of gold, it will serve us well to understand what investment means. Investment is an act of placing your capital in a medium that will keep the value of your money (capital) at par with the inflation rate, at least close to it.

For example, if I have Rs.500 and buy 2 shares of XYZ Company. 15 years later the share price of XYZ company is Rs.2,500. That means my Rs.500 are now worth Rs.5,000. To conclude, investing in XYZ was a wise decision. In 15 years, it has given 1000% growth.

Coming back to gold, taking a cue from the above example, you have to ask - can gold grow with time? The answer is - it certainly can. The data of last few decades shows that gold has witnessed a steady rise over the last few decades. However, the important element to understand is what factors have propelled the price of gold? The historical data shows whenever there is uncertainty in the market or if there is any prolonged geopolitical crisis, the price of gold rise. In such situations, investors lose faith in all the asset classes and repose their faith in gold as they believe its value will not fall beyond a point. This is true, but it doesn't make gold a good investment. This quality only makes gold a perfect tool for hedging.

Things That Don't Work

Gold is a commodity. Gold is not a business nor is it a legal tender. It is just a precious commodity. If you study other investment instruments like equity, debt or even forex, there is a fundamental underlying business to all these investment mediums. The day to day price movement of stock and bonds is a reflection of underlying business activities.

To understand this concept better let's take an example of equity. When you invest in a certain company's stock, your money goes to the underlying company. There onwards the working efficiency of that company defines the value of that company's stock and also the value of your investment.

However, when we look at gold, the only thing responsible to move the price of the gold is this belief that someone will give it a higher price. It doesn't have a business, it just derives its value from this belief. In a way, gold is unproductive. It doesn't contribute to the economic growth.

Therefore any investor who wants to invest in gold should take a moment and check for other alternatives at his/her disposal i.e. mutual fund, direct equity investment, etc. A primary analysis will tell you that if you invest the same amount in the above-mentioned investment options there are chances that those options would give better returns than gold. As discussed above, the reason for the price movement of gold is the fear that other asset classes i.e. equity, bond, etc. will lose their value in future.

Still Interested? Here Are Some Alternate Routes To Invest In Gold

There are many people out there who would like to invest in gold despite being well aware of its shortcomings. For such people, the good thing is that it is not required to own your gold in a physical form. Owning gold in a physical form invites risks like theft of gold. Also, one has to make provisions for the safety and security of the of gold.

Ideally, you should buy gold in physical form only when you want to make jewellery. In a situation where you want to invest in gold then you should consider options like Sovereign Gold Bond or Gold ETF and for trading in gold, you can opt for commodity trading. By choosing these options, you don't have to bother about the storage and safety of the gold as you don't get delivery of it. However, you hold full ownership of the gold you get for your invested amount. It's just like buying actual gold minus hassle of its safety.

The Sovereign Gold Bond and Gold ETF follow the Indian rate of gold. Therefore, wherever the rates of the gold rise your investment goes up and vice-versa. The important point to remember is that these are not the mediums to beat the market volatility of gold.