Gold prices have been dropping of late, and many people are wondering if it is the right time to start investing in gold, but the answer may not be that simple. Gold prices have come down due to various reasons ranging from the global economic recovery, India’s economic recovery, a stronger rupee, and bullish stock markets. Apart from this, global markets seem to be firm and doing well, meaning with more risk appetite in the markets, resulting in lower investments into gold. One of the reasons that gold prices have come off their recent highs is that the markets in countries such as USA have started doing very well, resulting in an increased risk appetite, which in turn leads to reduction in gold investments. Another important factor to keep in mind, especially in the Indian context is that gold prices are denominated in dollars and traded in the international markets, and the domestic gold prices are arrived at by simply converting these dollar prices to Indian rupees at the prevailing rates.
One of the most popular forms of gold investment has been through the gold ETFs, which unlike physical gold purchase one does not hold the gold but stores it in electronic form – making it easier in terms of security. Typically 1 unit of any gold ETF is equal to 1 gram of gold. You invest in the ETF, and in turn the asset management firm buys an equivalent amount of gold and holds it. This is a good option since there is no requirement for you to select the gold and ensure purity, nor do you have to ensure its safety. One can buy gold ETFs for the same price as a gram of gold (with a few added charges, e.g. brokerage), and hold the required amount of gold in demat form, without any hassle. One also has the option of instantly liquidating one’s holding for cash, as compared to physical gold which one needs to sell back, which could take time.
Gold ETF’s are cheaper than physical gold (for long term holding) since you pay only brokerage charges of around 0.5% as compared to 10 – 15% making charges for physical gold (i.e. If one buys jewelry). It is important to keep in mind that investments in gold are taxable at the time of redemption/ sale of the gold. In the case of gold ETF’s long term capital gains are calculated post 1 year of holding and is currently 20%. However, one can use indexation to reduce the tax burden.
Although gold ETFs are more attractive than physical gold, the most important question is whether to invest in gold or not. Given the current drop in gold prices, and the global risk appetite increasing, investments in gold may not yield the same returns as in the immediate past. Keep in mind that over a decade or so, gold will yield on average 10% per annum. However, that being said it is advisable to keep 5 – 10% of one’s investment portfolio in gold in order to diversify, this is especially true of the majority of one’s investments are in equities. Overall, gold is no longer a one way street, with any investments in the precious yellow metal going only upwards. One can trade a small amount in gold (if required) but ensure to book profits regularly.