Gold prices are at a record high. In the past twenty years, both gold and the S&P BSE Sensex have
given similar returns. If you stretch the period to 25 or 30 years, the Sensex comes out a winner. That can confuse many. People tend to ask if it is worth going through the pain of learning about financial assets at the end of it all. Gold is so easy to buy and own. There is minimal complication.
Indian households, temple trusts are believed to own close to 25,000 tonnes of gold, according to the estimates of the World Gold Council, a global body. That is perhaps one of the most significant gold hoarding anywhere in the world. But the entire debate is an unfair one. Gold is a precious metal for you to park your money. You buy gold as you are interested in knowing about other avenues of using cash. You buy gold because you think the world is going to end soon. Effectively, you are protecting your wealth in a way you know best.
In 2012, legendary American investor Warren Buffett wrote in his annual letter to shareholders that most gold purchasers get motivated to buy gold because they believe that the ranks of the fearful will grow. The rally in gold prices in 2020 is a testimony of that. There is a surge in the class of the fearful. But that cannot be called as an investment. It is just an avenue to save money. An investment is something that turns into something productive. A piece of gold is likely to remain a piece of gold forever. An investment in business would result in an output that would multiply many-fold.
When to buy gold
It would be best if you bought gold for traditional reasons during marriages or festivals. It would help if you bought it only when you are sure, businesses are going to fail, and money is likely to lose value. That brings us to the issue of inflation. It is predominantly used as a hedge against rising prices of other goods and services. However, a slump in demand for everything is likely to keep the inflation in check.
There is also minimal demand going forward for jewellery or from industrial applications. Currently, people looking to preserve capital are parking their money in gold exchange-traded funds. However, these investors can move out swiftly into other asset classes once things change, and economies start to open up. The right time to buy gold would be when prices fall and not at the peak where it trades right now.
When to invest
You should invest in financial assets like equity only when you are planning for long-term goals. Retirement or your young child’s education are the right goals for starting a systematic investment plan or SIP. You can buy equity index funds or Sensex or Nifty exchange-traded funds, to begin. As your confidence and income grow, you can purchase diversified equity funds. If you are willing to read and learn more about the finances of a company, you should put your savings in some frontline companies that dominate a particular sector. If you invest regularly and hold on to those shares, you could create adequate wealth for your retirement or your child’s
professional education.
The endgame
Wealth creation is a game that needs you to commit yourself. The onus is on you to read up. Know more about market cycles and the benefit of buying when prices are low and selling when you reach your financial goal. You can do that actively or passively. Indian households have enough gold in the house due to traditional reasons. There is no need for you to put more money into it. A passive investment in an index fund outperforms inflation in the economy over 10-15 years. Yes, it goes through cycles. However, if other people are fearful, you may want to figure out greed. Gold is a haven when you feel there is no hope. You can have a small portion of it in your portfolio. However, to create wealth, you have to throw your weight behind winning businesses.