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. Following the attack by Hamas on Israel last month and the latter’s ongoing retaliation, Gold as a precious metal returned to the spotlight after investors across the globe revisited their asset allocation plans based on fears of the broader fallout of this conflict.
This was also 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, which has since, escalated into a full blown war too.
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. 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 dematerialized 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 the current debt taxation rules sans indexation are applicable on the realized 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. The SGBs 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.
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 seek professional advise. 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 unfortunate ability of humans to create conflict and crisis.