Gold has traditionally been seen as a store of value, precisely because it is not subject to the whims of governments and central banks as currencies are. Gold prices are not influenced directly by either fiscal policy or monetary policy and would always be worth something, unlike a currency that could end up being almost worthless, for example; because of rampant inflation. Further, gold has an emotional attachment that can make it different from other investments.
LEARNING OUTCOMES
At the end of the course, you would be able to understand:-
- Gold as an Investment
- Returns from Gold Investment
- Investing in Gold
- Trading in Gold
What is Gold?
Gold is one of the most non-destructive, brilliant, and beautiful of metals. This unique set of qualities has made it a coveted object for most of human history in almost every civilization, and there have been active gold markets for over 6,000 years.
Gold is one of the oldest ways to store wealth. Gold has had an impact on the everyday economic activities of ordinary people.
While gold does have industrial uses, its demand mostly originates from investment purposes like gold coins and jewelry. Jewelry production represents the most stable long-term source of demand for gold and was one of the earliest uses for gold. Sociocultural factors mean that the primary sources of demand for jewelry are in Asia, with China and India constituting the largest markets. Demand for industrial fabrication arises mainly from dentistry and electronics.
Demand of Gold
Combining Security and Aesthetics
Consumers view gold as both an investment and an adornment. Consumers find gold as a safe investment. Data from the World Gold Council shows that consumers increasingly buy gold explicitly as an investment asset.
Protection against Volatility
World over, people want to hold gold to protect themselves from volatility and uncertainty. Looking at the influence of stock market conditions on gold, the largest driver for buying gold is volatility. People would buy gold whether the stock market booms or goes down. They would buy gold if the stock market is volatile. This highlights consumers’ preference for gold as a safe haven, an asset to buy when other assets lose value. Underlining gold’s attraction as an asset for good times and bad, most consumers would buy gold whether the domestic economy is growing or anticipated to go into a recession.
A Trusted Asset
Analysis of consumers’ savings habits highlights gold’s position as a trusted asset. Among savings and investments, gold products lie just behind cash, bank deposits, and other mainstream savings accounts. Looking closely at gold-related products, a good percentage of people invest in gold deposit schemes, gold coins and bullion, paper gold, and gold accumulation plans. These products are significantly more attractive than bonds, mutual funds, and even general insurance.
Easy to Understand
Households understand gold and gold products better than any other asset class. Looking at the length of time over which people stay invested in common market products, various gold investments were clearly the most popular, particularly in the short and medium term. This reflects a certain level of comfort around gold and gold-based products.
Returns from Gold
Investment Return from Gold
Gold, on its own, has no inherent investment return. That is, unlike a stock or a bond, it generates no cash flows in the form of profits, dividends, or interest income. Gold derives its returns from stress in other asset classes namely; equity and debt.
At times when equity and debt markets are steady or strong, gold does not deliver. With flat periods and surging periods, gold’s overall return has tended to be mild over the years. gold returns have generally been in the 6-12% range most of the time. Returns averaged out to just under 8% over the years. For long-term portfolios, holding the precious metal is likely to deliver more or less reasonable returns.
Investment in gold is a way of protecting your money against inflation and economic collapse. As precious metals whose supply is limited, they are less vulnerable to being completely devalued through the printing of more money.
Buying gold bullion is a common choice for those looking to protect their money for the future, by purchasing a tangible asset whose use as a symbol of wealth is as old as human civilization itself.
Investing in Physical Gold
The ownership of gold jewelry has a substantial disadvantage in that acquisition costs are extremely high because jewelry is often marked up by manufacturing costs in a range of 10-50% or even more in retail shops. All jewelry pieces are different and their values are subjective. The real value of jewelry is in the gemstones, the design, and the craftsmanship. These greatly outrank the value of the gold.
The advantage of physically owning the metal in form of bullion coins or small bars is the liquid market for buying and selling them. That means it is comparatively easy to find buyers or sellers. Coins and small bars could be an appropriate gold investment method, especially for people whose view is long-term and for whom physical possession is the main objective. The disadvantage is the significant difference between the buying and the selling price (5-10% or more). Moreover, there are considerable storage costs. The overall costs for dealing, delivery, storage, and insurance can add up to a 10-15% additional amount.
Investing in Non-Physical Gold
An alternative means of investing is to buy a gold-based mutual fund or exchange-traded fund (ETF). The value of an ETF and a Mutual Fund unit tracks the value of physical gold with some slight differences. Investment in Gold ETFs and Mutual Funds is a passive form of investing in gold.
One can invest in stocks of gold mining companies also. The value of these companies may not always directly correlate with the value of gold itself and may be subject to influences unlinked to the price of gold. For instance, if a mining company is affected by an industrial accident, its stock could fall dramatically even if the price of gold is going up.
Another way of getting direct exposure to gold without physically owning it is to buy a gold certificate. Currently, the gold certificates are issued by the company which is backing them. There should be an equal amount of gold backing the certificates as the company claims. The problem is that those certificates are not really representing the gold, they are as reliable as the company backing them. So investing in gold certificates is not the same as buying physical gold. However, investment in gold certificates issued by a government brings an element of safety and liquidity, for e.g. GOI Sovereign Gold Bonds.
Advantages of investing in gold in the non-physical form are; 1) ease of buying and selling, 2) no requirement of storage, and 3) could be liquidated without loss of value.
Investing in Digital Gold
In the era of blockchain, digital gold has emerged as an opportunity to invest directly in gold while avoiding many of the challenges of owning physical gold. Digital gold is essentially a blockchain-based digital token technologically similar to Bitcoin, but unlike Bitcoin, the token is backed by a real-world value, the equivalent amount of physical real gold reserves.
In this way, the owner of digital gold doesn’t need to take custody of their investment because it’s held in a vault by the token issuer. This makes digital gold cheaper to handle than physical gold, plus the owner doesn’t have the headache of organizing storage and insurance.
Advantages of Digital Gold
- Anytime entry and exit options.
- Option to get delivery in physical form.
- You can invest with a smaller amount of SIP, for e.g investment in 1 gm of gold per month.
Disadvantages of Digital Gold
- Not a regulated product.
- Intermediary costs and taxes make it expensive comparatively.
