Investments in gold yielded the best returns across asset classes in 2022. Smart investors have historically used gold as a natural hedge in their portfolios to their equity holdings as in periods of crisis, when equities tend to consolidate or weaken, gold has surged.
This was clearly witnessed in the early months of 2020, when the first Covid wave swept across the globe. After a brief lull, it was witnessed again following the break-out of hostilities between Russia and Ukraine that escalated into a full blown war. A weakening US dollar and the near complete collapse of several cryptocurrencies has had investors rushing back to the relative safety of the precious yellow metal, historically known to be the asset class of the last refuge.
Other than commodity traders who deal in the precious metal and are not averse to selling it when found profitable to, the rest, by and large, tend to hoard and pass gold down their generations. This trend is unlikely to change soon.
What has changed though is the growing number of investors who prefer to use gold as a pure investment avenue and accumulate it with the clear cut intention of profiting from it at the appropriate time. So, what are the common investment avenues used by those that invest in gold? Exchange traded Funds (ETFs), Fund of Funds and of late, Sovereign Gold bonds.
Gold ETFs are units representing physical gold in dematerialised form. One Gold ETF unit is equal to 1 gram of 24k gold, and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments and are listed at the premier stock exchanges, and traded just like the stock of any company.
A demat account is necessary to transact in Gold ETFs and debt taxation rules are applicable on the realised gains therefrom. Gold Fund of Funds, more commonly referred to as Gold Mutual Funds are open-ended funds which invest in units of Gold ETF. The returns of these funds reflect that of the underlying Gold ETF. While these funds are very convenient for making pre-set (eg.. SIP) purchases and sales in gold, the expense ratios levied by the fund houses running them, make them marginally costlier. Its taxation is the same as ETFs.
Sovereign Gold Bonds (SGBs), which is relatively newer, is issued by the central bank (RBI). It periodically issues SGBs multiple times in a year and fixes a price for each issuance. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. Notably, while the capital gains from these bonds are tax-free if held till maturity, they have a lock-in period of 5 years which prevents one from cashing in on it in case of a spurt in the price of the yellow metal.
A look at gold returns over the last 10 years suggests that there is money to be made in gold by a patient investor. Be patient and bet on the ability of humans to create a crisis. However, the timing of entry and exit in this asset class matters a lot and to mitigate the risk of going horribly wrong with timing, it
might be better to use the SIP or STP route to make investments.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com