Since ancient times, investment in gold has always been considered an essential part of one’s investment portfolio. With its limited uses while it surely started losing charm amongst value investors , it did manage to serve as last resort to retail investors who did buy them with socio-cultural factors attached to gold and never expected this is going to be such a value add to their investments. Being highly liquid and amongst the most scarce, Gold does act as a value diversifier and means to mitigate losses during a stressed market.
Global gold market shows a picture of diversity and growth
Gold’s production volume tripled and buying trends quadrupled across the globe annually since the 1970s . While the range of taxes vary from country to country, more often investment in gold is free from VAT or GST , however it is advised to check local tax rules . Not to miss noting, Capital gain tax is often levied at time of sale of Gold .
Well, with its own limitations it becomes important to understand what percentage of your portfolio should be in Gold to achieve maximum benefit? According to Portfolio allocation analysis (by Richard and Robert Michaud), investors who have 2% to 10% of their investment in gold, have significant improved performance. This also holds true while assuming conservative average gold return of mere 2% to 4% – which is quite below its actual – long term historical performance.
Modes To Invest in Gold
For those who missed to catch the bus while gold was soaring high, here are modes to invest in gold when you would feel is right time to invest :
- Physical gold such as bars, coins, jewellery etc. : Small bars and coins form two-third of annual investment in global gold demand for last decade. While investment in form of jewellery, is not only used as a wearable but also proved to serve as a means to sail through financial emergencies.
- Investing in gold-backed ETFs : Investment in gold exchange traded funds (ETFs) and exchange traded commodities (ETCs) constitute one-third of global gold demand. Investment in an ETF serves as a cost-effective manner of owning paper gold. Such investments trade on stock exchange with gold as the underlying asset. Besides convenient trading options, trading in ETFs also saves investors from high initial buying and selling charges that go into physical jewellery.
- Investment in Sovereign gold bond : This is another alternative investment mode to own paper gold. Issued by the Government, where the government intermittently opens a window for investors to buy SGB’s. Often this is offered every 2-3 months where the window remains open for about a week.
- Digital gold : Amongst latest investment in gold, when investors can buy gold online and take possession when need arises. This offers great convenience to investors to benefit from outright ownership of physical gold. Companies offer Digital gold on mobile wallet nowadays for easy buying options, for e.g. “Digital Gold” on Paytm , “GoldRush” by Stock holding Corporation of India on their website and “Me-Gold” by Motilal Oswal
- Buying gold derivatives: This is more for investors with sound knowledge into futures, forwards and options. Derivatives are traded over the counter and on exchanges. For derivatives traded on exchanges, settlement takes place in a central clearing house where buyers and sellers match, while OTC derivatives are bilateral contracts with more flexible structures but added counterparty risk.
Amongst many available options to invest in gold – right time, right price and individual’s investment appetite remain important underlying factors of consideration.