8 questions to ask yourself before buying gold this Samvat 2076

This Dhanteras as you usher in a new Samvat 2076 with gold purchases, here are 8 fundamental questions that you must ask yourself.

Oct 24, 2019 09:10 IST India Infoline News Service

Dhanavantri on Dhanteras
Diwali is celebrated across India as the festival of lights and the harbinger of prosperity. One of the most popular ways in which Indians usher in the New Year is by purchasing gold. Gold as an asset class has stood the test of time but it needs to be remembered that Indian households possess close to 22,000 tonnes of gold valued at nearly $1.3 trillion. That is obviously lot of money locked up in gold. This Dhanteras as you usher in a new Samvat 2076 with gold purchases, here are 8 fundamental questions that you must ask yourself.

Does gold fit into my overall financial plan?
The yellow metal may have a perpetual allure but it has to fit into your overall financial plan. Normally, financial advisors recommend allocating 10-15% of your overall portfolio mix to gold. Here we are talking about gold as an investment and not the gold you consume as jewellery. But any gold purchase this Dhanteras must go through this critical test. At the end of the day, gold is a hedge against uncertainty. It is not an asset that creates value over time. Hence, you need to tweak your exposure to gold accordingly.

Does gold sync with current economic scenario?
This is an interesting point to look at. Normally, gold as an asset class performs best when there is global uncertainty. After all, the best performance by gold was seen in the 1970s and post Lehman in 2008, when global uncertainty was at the peak. How does this gel with the previous point? You still need to maintain your portfolio allocation of 10-15% to gold. But, when the level of economic uncertainty or geopolitical strife is higher, move it closer to the upper end of the range at 15%.

Should I buy physical gold or gold bonds?
Gold is not just about how much to hold but also how to hold? Today there are a variety of options to hold gold. Should you hold gold in physical form or in the form of gold bonds? From an investment point of view, gold bonds offer a number of advantages. They can be held in demat form and you do not have to worry about storage, insurance or conversion costs. In addition, the icing on the cake is the 2.5% interest that gold bonds pay.

Should I buy gold bonds or gold ETFs?
If you want to hold your gold investments in non-physical format, should you opt for gold bonds or gold ETFs? Here again, gold bonds offer you 2.5% interest plus a discount on digital investments. Also, gold bonds held to maturity (8 years) are fully exempt from LTCG tax. But gold bonds are not available on tap, and that is where gold ETFs score. Also, gold ETFs have a low cost structure to make it a good passive investment. Gold ETFs are also a lot more liquid and can be bought and sold like any stock in the stock market.

Is digital gold the most cost-effective class available?
People often ask if digital gold (e-gold) is the most cost effective method of holding gold. In a way, digital gold is the best proxy for physical gold, but without the hassles of physical gold. Since all digital gold units are only through the MMTC-PAMP window, gold is certified and equivalent gold is ring-fenced in the vault. It is as good as physical gold because digital gold can either be monetized or converted into gold coins.

What is the purity of the gold that I am buying?
Gold purity is not a major issue when you are buying in non-physical form since the product is standardized. But when you buy physical gold, always opt for the highest level of 999 purity and insist on 24 carat gold. This loses least value due to its low non-gold composition. Digital gold is structured for high purity units and that is a major positive.

Can I get a loan against these gold holdings?
If you are looking at loan against gold, physical gold works best. It is possible to walk into any bank with your physical gold and get a loan sanctioned and disbursed in less than hour. Loans against gold bonds are not possible during the lock-in period and not too many banks will fund against gold ETFs. That is a call you need to make, depending on usage.

Check for liquidity of the gold in the secondary market
This is an important aspect of gold purchase decision. Physical gold may be easy to borrow but secondary market sale entails loss in value. Also, gold bonds can be locked in for 8 years and even secondary market liquidity is only possible after 5 years. Gold ETFs are relatively more liquid since there is a ready market. In case of digital gold, liquidity is normally possible when window is opened but smaller quantities can be liquidated easily.

This Dhanteras as you usher in the New Year, remember that gold buying is a lot more nuanced than you imagine. A few simple questions can help you along the way.

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