Gold has served as a sign of wealth since the olden days and has managed to maintain its relevance as an investment even in the Information Age. Approximately 190,000 tonnes of gold are available globally in its physical form, with jewelry accounting for 50% of this total. Central banks worldwide have an extra 17% and 13% of global gold reserves, which are used for diverse industrial reasons. In India, gold is considered auspicious and valuable for various reasons. If you grew up between the 1950s and 1990s, you remember gold as a symbol of social standing and wealth.
Physical gold was formerly seen as a terrific investment, but that is no longer the case for various reasons. As you can see below, there are various hazards to owning gold.
The Dangers of Investing in Gold
Gold investments have their own set of constraints. Here are a few examples:
- Security Issues
When purchasing gold in the form of jewelry, coins, bars, and so on, it should be noted that the gold rate, GST, and making charges are all levied against the individual and are non-refundable. Aside from unrecoverable charges, existing gold assets such as jewelry are always vulnerable to theft due to their high prices and value. Digital gold may be an option for investors looking for the same benefits as physical gold but without security issues.
- Storage Issues
Storing actual gold in the form of jewelry or coins can be difficult because:
- Theft and robbery are always a possibility.
- It may need the use of a separate safe.
Alternatives such as digital gold, gold ETFs, and so on do not have storage issues because they are paper gold assets.
- Bringing Charges
Gold is simple to buy and sell, but it has commission concerns. Making charges may raise the total cost of your gold jewelry purchase. You may even be required to pay a fee when selling your gold.
Gold ETFs do better in this regard. Gold ETFs invest in gold bullion and are traded like stocks. ETFs have a low expense ratio in general.
If you wish to invest in gold without paying the making charges, you can use Gold ETFs, sovereign gold bonds, digital gold, and other methods.
- No higher returns
Any investment is made to earn a profit. Gold returns have been substantially lower in recent years than, for example, stock returns. Physical gold returned substantially less than the Nifty in rupee terms during the last decade, with a compounded annual growth rate (CAGR) of 5.7 percent.
Given the challenges connected with investing in actual gold, an investor may be better suited to considering other possibilities, such as paper gold.
- Purity Issues
Gold purity can be an issue, especially in years or decades-old units. “In terms of real gold, you have no idea of its purity no matter where you get it… The true value of gold is determined by its purity, which is assessed in ‘Carats’ (K). The purest kind of gold available is 24K. Concerns about purity can be avoided if you buy gold from a reputable and trustworthy seller.
Furthermore, if you invest in paper gold, you won’t have to worry about purity issues because the price of gold bullion is tracked.
- There is no passive income.
Unlike equities, mutual funds, or peer-to-peer lending, physical gold investments do not create passive income. This could be a problem if you’re considering retiring early or supplementing your income with investments.
Selling your real gold investments is the only way to profit from them.
Is Gold a Sound Investment?
Physical gold offers advantages and can be an excellent long-term investment. It can be used to protect against inflation and to obtain quick loan. Furthermore, it is a coveted possession that most Indian inhabitants value. First and foremost, the question requires recognizing two aspects:
- Why are you interested in investing in gold?
- Can gold increase the value of your investment portfolio?
It’s also good to be conscious of the shining yellow metal’s limitations. Physical gold is a limited commodity with inherent risks such as theft, storage, making charges, etc. Mutual funds, digital gold, or gold ETFs do not bear these risks.
So the answer to this issue is whether you regard gold as an asset you want to touch, feel, and see or as something you want to invest in for long-term returns.
To summarise
Remember to keep your overall investment plan and financial goals in mind when selecting how much to invest in gold. There are times when gold investments appear more profitable than stocks and vice versa but there are many risks associated with it. Markets react to macroeconomic developments as well as a variety of other variables.
As a result, it is critical to monitor and adjust your portfolio’s risk-return balance regularly and know about the complete risks before investing in it.
This post was published on February 24, 2023 6:56 pm