Gold Investment Thesis

Financial knowledge is required for each & every individual, you might be doing some job or business and earning some bucks, where will you park your extra funds to beat the so called inflation. You might be student or someone who is not earning money but your parents or someone in your family might be earners right. They will also invest their money is some or the other asset classes in order to create wealth for the family, don’t you have the need to revisit those investments by adding your word in decision making ?

Whole world runs on money, atleast one must have idea how the money works, otherwise you will be keep on working for your whole life !!

Most of the previous or current generation people have seen or invested or used gold at some point of time. I thought of giving my perspective about Gold as an asset class in investment point of view. It will be a long read because I will be writing in layman terms trying to explain in detail, patient & passionate long form readers will stay till the end, for rest of the busy folks, can’t help you much, tried my best to motivate you folks in the beginning lines. No more motivation dear, Bye Bye !!

Gold:

Let’s go back to basics first, starting from history, how it evolved over the time. In initial days, we don’t have money, we used to follow barter system. Later, it became very tough for the people to follow that system because they don’t have a metric to measure true value of goods which they are exchanging. Later they have chosen Gold, why ? Gold is limited in supply and it is a commodity which can be available everywhere, many countries used this as medium before money came into picture.

If you have 1 bar of gold, you will get X kgs of rice, in this way people shifted from barter system. As time passed, it became very difficult for the people to carry large amounts of gold due to fear of theft. Many such incidents they have witnessed. Government introduced currency and pegged with Gold. So, indirectly government is saying, instead of carrying 1 bar of gold, take this coin from Government (1 Bar of gold = 1 dollar which govt printed)

Did you get it? Government cannot print money as they wish, if they have X amount of Gold bars, they only have right to print X amount of money. Upto that point, everything is fine, government linked currency with Gold. In 1970’s or 80’s somewhere in that time, US government decided to remove that Dollar and Gold pegging, they simply said, Hello Boss, we are having some trade deficit and economy situation is not good, we need to print more money to boost the economy and avoid any crisis situation. So, they removed the linkage between currency and Gold. (1 dollar = 1 bar of gold equation will not be true anymore) Government turned on printer, they can print as much money they want without any gold backups, they can print and directly inject liquidity into the system. Everytime, they face crisis, simply, they are turning on thier printer and injecting liquidity boss. Do you know what US exports most? Any wild guess? US is major exporter of Inflation. Kidding but it is true becase every time they turn on thier printer, more money they will introduce into the system, inflation will keep on increasing and create same ripple effects in other nations because many nations depend on US for many things (right from imports, exports, services, deals and so on).

Enough of history class, let us understand what factors will effect the gold price movement. Because without knowing how gold price will go up and down, how you are getting ready to press invest button buddy?

• When there is any crisis or uncertain problem worldwide, it will have impact on Gold prices. Prices will hit the ceiling, they will shoot up. Simple, Gold is considered as safe heaven and everyone will prefer this asset class to beat the inflation.
• To beat the inflation, Gold has gone up in earlier years, why Gold? because it is limited in supply !! But now, we have digital currency like Bitcoin also which is limited in supply, definitely even if you like it or not, some money will be flowing to digital currencies like bitcoin. That is the reason, crytpo currencies like bitcoin, people call it digital gold.
• Think practically, no brain to apply here, how the price of an asset or anything will move up or down basically ? Demand and supply right !! Let’s say, if Government buy more gold and keep it in reserves, amount of Gold circulating in the open market will dry up. Then automatically scarcity comes into picture which pushes the price higher. Suddenly, Gold prices shot up, Government releases its reserves, then amount of gold circulating in the market will go up, price will eventually go down.

You may ask, why will Government buy and sell Gold? They can do anything boss, they have the capacity to decide how much amount of money should flow in that asset class in higher level !! Government can control inflation, Government can control bond and equity market by altering the interest rates. How they will control ? They will create rules and restrictions simple.

Why Goverment introduced ELSS tax saving scheme and 3 years lock in period? You have only that option or product to chose in the market if you wanna save tax right, in that way they already how much crores of money is flowing into these ELSS mutual funds. Same applies to whatever other tax saving schemes they added in section 80 C.

This is just an example, everywhere where the money is flowing, directly or indirectly government hand will be there and they have capability to frame rules and take away some amount if they need via taxes. It has advantages and disadvantages, we are not debating that thing here !!

• How can Gold production is increased? They will simply dig. The amount of Gold circulating in the market will also be linked to amount of gold they dig. This is also slightly considerable factor which effects the Gold price.

We have covered history of Gold & what are the factors that will effect the gold price movement. Let’s get into our favourite topic, how many ways are there to invest in Gold and thier disadvantages and advantages.

Routes to invest in Gold:

1. Physical Gold
2. SGB (Soverign Gold Bonds)
3. Gold ETFs / Mutual Funds
4. Digital Gold

Physical Gold:

Earlier back in times, people don’t have many options, this became a default option. One reason to buy physical gold is you can feel and touch. Haha !! Yes !!

Advantages:

• Imagine you are somewhere in Srilanka or Zimbabwe, Government itself will collapse in some scenarios, physical gold is the one which will save you in that scenario. Value of gold will be same across the world except the marginal differences here and there.
• Some people might have some cash pile sitting in thier house, let’s say you don’t want to put it in bank, because Government will know that you are having cash and even in that bank savings account or FD whatever interest you make, you are liable to make capital gains tax. In that cases, if you don’t have large amount of money to enter in real-estate market, one can simply buy physical gold via different routes. Without any bill entries, you can buy gold, you must pay some commissions ofcourse !!

Disadvantages:

• Theft issues will be there
• Government will keep n number of restrictions on amount of physical Gold one can hold
• You will be paying the commissions while at the time of buying as well as selling

SGB (Soverign Gold Bonds):

I might be right or wrong, but I will narrate what I believe and what I have conviction for !! According to me, SGB’s are not good investment, they will ask you to hold some 8 years and they will say that they will be offering additional 2.5% interest after maturity, check exact numbers by asking Google baba.

Major issue I see here is, there will be no liquidity when selling those bonds. Liquidity I mean, if you want to sell the bond at 1000, there will not be any buyer who is ready to buy at that price, buyers will be available only at 998 let’s say. Direct 2 units of loss? Correct ? These are just fabricated numbers I took in order to explain you clearly. Liquidity issues will be there definitely.

Another problem with this SGB is lock in period of 8 years which is insane !! Anything can happen in 8 years. Suppose I invested 5 lakhs in 2020 in SGB, I require that 5 lakhs now due to some medical emergency, if I tried to sell those bonds, they will not offer that additional 2.5 interest also, and let us assume everything is going very good, economy is in stabilized manner. Then the gold prices will fall right ? Then obviously, it will be reflected in the bonds which you are holding, you will be exiting at lesser rates then ? Forget about making returns, capital loss will be there.

Last but not least, Government will issue these SGB’s and say that these bonds are backed by Government and these are secure !! But one thing to observe is, Government will not have physical gold behind these bonds, only word or assurance from the government will be there. It is not backed by physical gold.

Advantages:

• You can invest with minimum amount like even with 100 or 200
• Storage is not your headache
• No need to worry whether we are buying pure gold or not, there is no question about purity

One more point to add, inspite of some disadvantages, why some big people will buy SGB’s? There are some high networth individuls who will buy Gold bonds in crores. What they will simply do is, if they invested 1 cr worth of gold bond, they will show that Gold bond to a trading broker like upstox or zerodha like a collateral and depending on the broker, they will get 80 or 90 lakhs for that 1 crore collateral, using that money those bigshots can trade. They will simply do riskless option selling by applying some stratigies and make money. So, they are getting interest from Gold bonds and they are also generating some more money by keeping that gold bond as collateral. It’s a double win. That’s how big fishes play !!

Gold ETFs/Mutual Funds:

Advantages:

• No headache for storage
• No worries of purity
• One can buy with minimum amount

Disadvantages:

• SGB’s are tax free, these are not tax free, means whatever money/profit you made using these mutual funds are taxable.
• Since they are mutual funds, they will have expense ratio. If you are investing 100/-, 1 rupee will be gone to that mutual fund manager for managing your money (If Expense ratio is 1%).
• Actual returns of the gold and the returns you will be making from the Gold mutual funds will slightly differ more or less, technically people name it as tracking error.

Digital Gold:

People will buy Gold from Phone Pay, Google Pay, Paytm and so on !! That sort of investment is considered as digital Gold.

Advantages will be pretty much same, storage and purity will not be a problem. You can invest with 1 rupee also Haha !!

Disadvantages:

• If the market rate is 100, these platforms will make you buy at 101 or 102. Same time at the time of selling, if market rate is 100, they will make you sell at 98 or 99. That’s how these platforms make money using this gold investment option.
• I heard that there is 2-3% GST, which means if you buy 10 rupees worth of gold, you will only get 7 rupees worth of gold.
• There are some restrictions in the holding period as well.

According to me, this is worst investment guys, other 3 options are far better.

When I explained all these things to my friend, he became even more confused whether to invest in gold or not, if yes, where to invest ? Stay with me, I’ll give my verdict.

Let’s make things simple, how many options in higher level do we have if we wanna invest in Gold? Hardly 4.

1. Physical Gold
2. SGB (Soverign Gold Bonds)
3. Gold ETFs / Mutual Funds
4. Digital Gold

Among these digital gold is worst investment. Ruled out !!

Mutal funds & ETFs, here you need to pay taxes man, here you need to pay to that fat fund manager who is managing your mutual fund. Why to give your money to them? Avoid this option too !!

If you want to take collateral or loans or something like that, first check whether this is possible according to your broker or bank or not, even if you don’t have any plan of taking loans or collateral also, SGB’s are better than mutual funds. Tax free and no fund manager expenses. But here is the catch, as I mentioned earlier, in SGB’s we might have some liquidty issues while selling and we might not get full interest if we exit within 8 years. If you feel that liquidity issues hardly make any impact 1 or 2%, better to go with SGB’s because they are backed by Government and tax free also, best !!

Whatever schemes or routes available might be available in the market, physical gold is best according to me, many might turn the chair for a debate, government might put n number of restrictions, shop owner may ask you to pay commissions while buying & selling, whatever, I prefer physical gold as good investment, if you know how to escape from Govt restrictions and if you know who will provide correct purity of gold with less commissions, physical gold is best. Check the quality of gold while buying if you are buying physical gold, you can find youtubers explaining how to check quality of gold and all, please refer !!

So, by know, you might be knowing where you stand and which one to pick if you are ready to invest in Gold.

Let’s come to our last part of long discussion, whether to invest in Gold or not?

Hey Rohith, you should have told me this at the beginning man, why should I read an entire article till the end to know whether it is good to invest in Gold or not. Not fair? Haha !!

There are 2 perspectives to this query

1. Investment for hedging or returns
2. Personal Preference or choice

Personal Standpoint:

If you are thinking from an personal standpoint, go with your mind or heart, what it says will suit you. You might be having a wife who loves gold, then buy at good rate and hold until the time or situation comes.

You might be coming from an orthodox family who will buy atleast some or large amount of gold during the time of marriage according to your traditions & lifestyle, then what will you do if the gold prices are shooting up, what will you do man? Haha !! So, keep gold price on your radar and invest when prices are falling or atleast not at peak point. It might benefit you at the time of your marriage.

Some people will buy gold because, they can give the gold and get money from lenders. mortgage. So, those people have also tendency to buy the gold, if it is working for you that way, please go ahead.

Investment Standpoint:

Let me give you some facts first

So, India is taking major share in terms of amount of Gold holdings.

Let me put one more point on the table.

What did you see ? Central banks, Government everyone bought the gold. Later prices reached new all time high now ? Understood the game ?

They can keep on buying gold & reduce the circulation of gold in the market, supply will become less, demand will become more, prices will shoot up eventually simple boss.

Government has its fair share of hand in regulating gold price by regulating gold circulation by increasing gold reserves or releasing gold reserves. This fact has proven many times in the past, you can also do your analysis and math by checking the history.

Indians hold most amount of gold and for the remaining gold, government has the control of circulation. Then will it become a good investment ? A clear No, we can’t predict what government will do. So, if you know, you can invest.

Many people will keep gold as hedge against inflation.

We have different asset classes to beat the inflation, gold is not the only option.

Gold, Real-estate and bitcoin (crypto as a whole) are limited in terms of resources, so their prices will eventually go up, there is no doubt about it.

But one cannot exactly say when these gold prices will shoot up and how much these prices will shoot up. They remain flat for many years and suddenly the next upcoming year, prices will become double.

Even if you see the last 100 year gold price chart, stock market index returns gave more returns than gold. So, you can blindly go in that route right.

Among these 3 limited assets (Gold, Real-estate and bitcoin). You must have atleast one in your portfolio at some percentage (5-10 or more depending on your risk)

If you wanna buy gold, physical gold is better.

If you are buying for personal reasons, don’t think whether it is good investment or not.

If you are buying for an investment point of view, index funds give better returns than Gold in long term (10-20 years time frame) but if you don’t have real-estate and bitcoin in your portfolio, you can definitely invest some amount in Gold because it is limited in nature.