It was around 250 AD, under the rule of Gupta Dynasty, the first gold coin was introduced. Since then an Indian’s obsession over gold hasn’t reduced, in fact, it seems to have multiplied over time.
Today, gold is a common liquid asset which has value all over the world. Owning gold is owning money. But is gold investment in current economic climate profitable or not?
Especially when many other options such as stocks, real estate, bonds and many other with much higher returns are available to investors.
Advantages of Investing in Gold
How is investing in gold different from buying an expensive painting considering the fact that yellow metal does not have any function besides its aesthetics?
- Hedging : The answer to this is the fact the owner of gold would be hedged from any financial turmoil as it would maintain its real value.
- Paper Gold : In recent times, a more convenient, cost-effective and tax-efficient alternatives of gold investment has come forward i.e. Gold ETF, Gold Mutual Funds and Equity based Gold Funds. Also known as Paper Gold, these alternatives are fast becoming popular and accounts to almost 35% of the gold demand. They remove the burden of physically holding the asset and also counterfeit the loss of wastage that is charged by the jewellers at the time of resale. Gold ETF can easily be converted into physical form if and when the need arises. For these very reason a small portion of total savings should definitely be invested in gold.
Disadvantages of Gold Investment
One may say, if gold is such a good investment opportunity why not put our whole money in it? Why only a small percent?
The reason behind this is that despite its advantages, there are some considerable shortcomings of investing in gold.
- No Tax Benefits :There is no tax advantage for investments in gold, unlike in other investments.
- Highly Volatile : Like other commodities, gold prices can be extremely volatile—rising and falling according to the changing economic and political conditions, and market trends.
- Global Factors : Bonds pay interest and stock pay dividend but invested-gold value are solely based on the supply and demand by the global market. As a result any attempts of deriving valuation and expected returns are highly speculative. The value of paper gold is also dependent on yellow gold directly or indirectly.
A small percentage of investment in the portfolio can be allocated to Gold as it is considered to a hedge against inflation. Also as it is not correlated with other investment assets it can diversify the portfolio reducing the overall risk exposure. However a major investment in gold is not recommended as it would regress the overall returns from the whole portfolio.
