5 ways to invest in gold

Why do people buy gold in times of unpredictability? Let us look at 5 ways you can own a piece of the precious metal.

Apr 28, 2020 10:04 IST India Infoline News Service

In times of uncertainty, gold has always shined brighter than other financial assets. A large number investment in gold comes from individuals looking to protect their wealth from economic collapse or recession. Due to gold's reputation as a safe-haven, investors are drawn to the precious metal when confidence in other forms of investment is low, raising the gold price and supporting the idea that bullion is a safe asset. Prices of the yellow metal have rallied over 33% in the past 12 months, as investors flock to buy the safe haven amidst the instability in financial markets fueled by the coronavirus pandemic. So why do people buy gold in times of unpredictability?
  • Inflation hedge: Gold acts as an inflation proof investment. It preserves your purchasing power. The 10 grams of gold purchased 100 years ago, will command an equivalent price today. This is unlike other purchases, which are devalued as inflation chips away at the value of the currency.
  • Intrinsic value: The yellow metal over centuries hasn’t lost its appeal. The history of this metal has proven that it will always be in demand. Even if there were a domestic or global crisis, you would always be able to sell gold.  Which is why in many cases it acts like an international currency. No matter which part of the world you are in, gold will always hold value.
  • Liquidity: Gold can be easily be liquidated and converted into cash. The value of gold will more or less remain the same no matter which currency it is converted into.
  • Less volatile: There is a finite supply of gold in the world.  Someone once said that there is only enough gold in the world to fill two Olympic-size swimming pools. Hence, as demand for gold increases, prices increase exponentially. Since this is a rare metal, supplies can’t be enhanced instantly to meet demand. This also reduces the risk of devaluation, as lower prices then quickly attract more, new demand, which will once again fuel price increases.
Now that we have understood why gold is especially in demand these times, let us look at 5 ways you can own a piece of the precious metal.
  1. Gold coins and bullion: This is the simplest and most conventional form of investing in gold. Gold bullion, bars and coins are made with a purest physical form of gold. Gold coins are available in different sizes. Gold bars, coins and bullion are of 24K (carats), and these can be kept safely in bank lockers or any other safe place. With ownership of coins and /or bullion, you get a direct, tangible ownership of the precious metal and its prices. There is also potential to yield premiums over and above gold spot price.
  2. Gold futures: You can buy into gold futures, which are traded on the MCX. These future prices tend to track gold prices, and the contracts have to be settled with a pre-determined period. Gold futures are risky investments as one has to settle futures even if they make a loss. Gold can be a profitable investment when all others fail. If you are concerned about inflation or the devaluation of your country’s currency, you may want to add gold to your portfolio. Nevertheless, as tempting as it may be to buy a lot of gold in a struggling economy, try not to get carried away. Gold bubbles exist, and in order to prevent yourself from being over-exposed to any asset class, you should always maintain a well-diversified and balanced portfolio.
  3. Gold ETFs: There are various Gold Exchange Traded Funds (ETFs) that investors could buy. Gold ETFs are better than physical gold, and offer many advantages. Nobody can steal gold ETFs as they are in the electronic form. On the other hand, you do not have to incur storage charges. Taxation on Gold ETFs is done in the same manner as physical gold.
  4. Sovereign gold bonds: This an investment in gold that is issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Sovereign Gold Bond (SGB) scheme is an alternative to purchasing physical gold. When people invest in gold bonds, they get a paper against their investment instead of a gold bar or a gold coin. There is no cost attached and instead you get an annual interest of 2.5% for investing. These bonds have a tenor of eight years and track the price of gold, just like a gold mutual fund. One benefit of SGB is, if you complete the tenure of 8 years, the investment is tax-free; i.e- long-term capital gain tax (LTCG) will not be levied on the investment.  This bond can also be utilized as a collateral against loans.
  5. E-Gold: E-gold is the process of buying gold electronically. E-Gold allows investors to invest in gold with much lower denominations (1gm or 2gm) than physical gold. The investment is held electronically in demat form and can be freely converted into physical gold. It is more convenient to buy and sell e-gold. One of the benefits of investing in e-gold is that there is no holding cost. In India, e-gold is offered by the National Spot Exchange Limited (NSEL). Investors who wish to invest in gold as part of their long-term portfolio, can buy e-gold in small quantities and hold it in their Demat account. Once their target is achieved, they can take the physical delivery of gold through the exchange. Those who don’t wish to take the physical delivery can always sell the electronic units and encash them.

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