Gold Investment, Price Prediction, ETFs, Bonds in India: All your questions Answered

It’s never too late to begin investing. If you’re worried about where to start, this may be just the right place for you.

What you must know before investing in gold

Investing in gold may sound complicated, but it isn’t. Once you figure out the right way to do it, it can help you get great returns. But how exactly do you figure out the process? The internet is filled with various facts and opinions that can become a serious overload. Wouldn’t it be much easier to have all the information you need in one place?

In this article, we go over every detail necessary when it comes to investing in gold, such as:

Can investing in gold be a good way of saving?

Buying gold is a good habit if you have difficulty saving money. The gold conversion to cash is high as its value tends to increase over time. If you don’t have a habit of saving in cash, buying gold is a great way to save. However, saving in gold is a long-term option and requires patience. It is an alternative to having cash in the bank. Saving in gold is different from investing in gold because investment means treating gold as a commodity that’s subject to speculation and long cycles

Why invest in precious metals such as gold?

Gold is a comparatively secured investment as compared to stocks and bonds. Investment in gold is needed for your portfolio diversification. Gold investments help manage the risk of your portfolio. If you have invested in stocks or bonds, which are high-risk funds, gold investments will balance your risk as gold price does not behave like other financial assets.
At the same time, it is highly liquid. Further, gold is part luxury, part commodity, which makes it a unique financial and monetary asset with its own properties. Gold is also used as a means of hedging against rising prices or currency fluctuations. It is always traded in dollars, which means it does not lose value against the declining purchasing power of a currency.

Is gold better than financial assets?

Pure gold is a tangible form of investment and is not typically subject to volatile market conditions. Gold is the only non-financial asset that offers you high liquidity and returns without any need to get involved in complex financial operations. Investment in stocks and mutual funds can be opaque while buying gold is an easy thing to do. It is independent of currencies and financial institutions. 

What is applicable GST on gold? Do I have to pay sales tax for purchasing gold?

The GST levied on gold 3 per cent. In the case of gold jewellery, you will also have to pay 5% on making charges.

The import duty of 10 per cent is still applied on gold, which makes the tax component 13 per cent. Post GST, there is no VAT or sales tax applicable when buying gold jewellery. 

Does gold offer protection against systemic risk?

Gold cannot go bankrupt and its value does not fall like currencies and other financial assets, which are also subject to market risks. On the contrary, scarcity of gold only raises its value. Since it has a strong inverse correlation with the US dollar, it can be an essential part of a diversified portfolio to minimise risks. There is evidence to show that when stocks or currency falls in value, gold prices increase. Its response is inversely proportional to other asset classes. 

Why is gold considered portfolio insurance?

Gold is like an insurance policy of your investment portfolio. It is the only non-financial asset that appreciates in value and has nominal storage costs. Unlike an insurance policy, you don’t need to pay any premium from your pocket to maintain the value of your gold. It is not directly related to your other financial assets such as stocks and bonds in India. Rather, it works in the opposite direction. It is an ideal investment for the long-term protection of your investment portfolio. 

Does gold act as a safe haven against currency weakness?

Gold does not lose its value in times of financial or political uncertainty and does not become worthless, unlike currencies or other financial assets bearing credit risk. People buy gold and trade it when market conditions are good. They trade it when the market is less volatile. Even otherwise, gold is a safe haven asset and a hedge. Gold is primarily money. It preserves your wealth. Unlike currency, gold is real money in hand, which cannot be printed and has no debts attached to it. 

Why is gold considered an essential component of a diversified portfolio?

Gold offers excellent diversification opportunities because it does not correlate to returns from other financial assets such as stocks and bonds in India. A strategically diversified portfolio must contain a mix of assets, especially different types of assets that do not correlate with each other. Your investment portfolio must maximise returns and minimise risk. Stocks, bonds, and cash investment must be complemented with investment in gold since it does not involve a high risk of depreciation in value. Alternative assets may face the market stress of instability, which can be perfectly balanced with a small allocation of gold in the investment portfolio. It will make your portfolio performance more consistent during unstable financial periods as well. 

Related: Why Gold Needs To Comprise 5-10% Of Your Investment Portfolio?

Is there a risk of a shortage of gold?

Demand for gold outstrips the supply. Even higher gold prices have not affected the demand-supply equation much. The Yale researchers’ criticality system states gold as vulnerable to supply restriction because of its widespread use and lack of available substitutes. Moreover, there are large US creditors such as China, Japan, Russia, India, and oil-producing nations that have been adding to gold reserves than investing in US dollars. Such huge gold reserves will drive the gold trade, demand, and supply in the future. In addition, physical gold is increasingly being used for wealth creation by investors in the market. The high volume of gold in private accounts means a shortage in supply and a corresponding increase in value. 

Is the gold market a commodity market or a currency market?

Gold is traded on Forex just like every other currency. It is traded on currency desks, not on commodity desks. In addition, central banks hold their gold reserves as foreign currency holdings. Thus, it is evident that gold is money and is traded in currency value. 

Is the price of gold manipulated?

Gold is reserved in central banks in huge quantities. Since gold prices influence interest rates and stock prices, central banks keep a close tab of the power of gold as a reserve asset. They understand its value and store it in vaults as an asset of huge value and as financial insurance. They allow a fully free market for gold so they can monitor the price direction and the market sentiment as a result. In a way, market participants play in the price mechanism of gold led by central banks that manage gold like currency and in a fashion analogous to other currencies. 

Related: Factors That Affect Gold Prices In India

Why not invest in gold using securities or derivatives?

Investing in derivatives is different from investing in physical gold. Its value is on paper so it becomes a non-tangible asset. Managing securities or derivates can be tricky and speculative, so an investor will need to have full knowledge of financial securities. Trading in derivates can fetch you high ROI and at the same time, it can result in significant losses in case of an adverse price movement of gold. Gold as a paper currency is vulnerable to financial and systemic failures.

Why not invest in gold mining shares instead of physical gold?

Physical gold is a hedge against inflation. If you lose investment value because of inflation, you can recover thanks to appreciation in the value of your gold holdings. You have an option to invest in gold mining stocks to gain more return-on-value than just physical gold. It depends on your overall investment objective; whether you want to grow your investment portfolio substantially on a short-term basis, or you just want a hedge. Physical gold will hedge against a market crash. As an investor you will need to decide between growth and hedge. Gold mining stocks are an investment in equities or in company stocks. Investing in the right mining stocks can fetch you higher returns. 

Why should I invest through strategic gold instead of going to a dealer?

Precious metals ETFs or gold securities investment is based on the price of bullion. This sort of investment using gold is further based on speculation since it does not offer the investor a value on physical gold. It means your investment in paper gold products is subject to bullion value market risks. You are not actually purchasing the bullion and you also cannot redeem your ETF value in physical bullion. You pay a premium on ETF purchases. There are other risks such as lack of transparency and lack of answerability. The price of bullion is not insured, so ETFs are exposed to further risks. It is not a hedge either. So individuals typically buy gold bars to protect themselves against the risks prevalent in the financial system. 

Why is opening a clear title account better than buying gold coins?

Investing in bullion on a secure platform is a better option than owning coins. Coins are accessible and handy but the manufacturing and shipping costs make them considerably more expensive to produce. In comparison, per ounce investment in larger bullion bars will fetch you better ROI. Gold and silver coins can be exchanged for cash in an emergency situation. However, there are safety, storage, and liquidity issues, plus other factors that affect the price of coins at the time of resale. Hence the need for investing in bullion to make your investment more efficient. A clear title account will enable you to buy and sell on the primary market at the spot market price. Coin dealers will add a premium on purchases and a substantial discount on sales. With a clear title account, you will get more gold when you buy and more money when you sell the gold

Is the gold I own classified as ‘investment gold’?

Gold, either in physical or digital form, is a valid investment in India. As per the Central Board of Direct Taxes (CBDT), there are no restrictions on holding physical gold as long as the source of investment or inheritance can be explained. It is crucial you file all purchase receipts and making invoices for tax purposes.

The legitimacy of digital investments either through ETFs, gold funds or Sovereign Gold Bonds (SGB) is pretty straightforward given the various KYC and investment checks in place. 

How do I ensure that I buy only ‘real’ gold?

Every item of bullion has these specific qualities: a specific weight, marked purity or fitness, a refiner’s marks, and a specific serial number. It is important to note that no two bullion bars are the same. They are differentiated on the basis of four specified qualities.

How can I check if my gold is genuine?

The government has made hallmarking of jewellery mandatory. According to the Bureau of Indian Standards (BIS), here are four components of hallmarking you should look for:

1. Purity in Karat is denoted as 'KT' and fineness denoted in parts per thousand (e.g. marking for 24KT be 24K999, marking for 22KT will be 24K916, marking for 18KT will be 18K750, and so on.)

2. BIS logo

3. Assaying and Hallmark centre's ID number/mark

4. Jeweller's ID number/mark

There are other ways to test purity as well. You can drop it into the water, for instance. Real gold will sink immediately since it is a heavy metal; it should never float. You could also take your gold to a reputable jewellery dealer; they have testing kits that indicate the purity of gold.

Is 22-karat gold a good investment?

22k gold jewellery is 91 per cent pure gold. The remaining 9 per cent is copper, silver, or other metals. When compared to 24k gold, 22k is more durable and costs less. People prefer buying 22k gold jewellery for its greater durability and affordability. 

Can I buy gold anonymously?

A few coins in a year can be bought privately. Similarly, small denominations can be bought anonymously. It does not require you to reveal your identity or disclose any personal information. 

Why should I buy gold?

Gold is today considered an almost indispensable part of a diversified investment portfolio. It is immune to inflation and currency devaluation and is not subject to market risks like other financial assets (stocks and bonds). Buying gold is a tradition that has retained its position as a high-value, long-term asset. If you are trading in gold papers, make sure you follow the trading market closely as it can be volatile in the short term. It is still a safer bet than other financial assets and a hedge against inflation and currency erosion. It is hence an investment worth considering.

Where do I find current gold prices?

Gold is traded virtually 24 hours a day, being a universal commodity, and the prices are constantly moving. You can track spot prices online or via trusted apps such as Moneycontrol Market, iBullion (Android), Gold Tracker (iOS), etc.  

Prices of Gold ETFs are also listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), where they are traded. Even though they mirror gold spot prices, your actual cost of buying/selling will differ on account of expense charges and brokerage.

Alternatively, as an offline source, you can walk into any bank branch, which will have the gold price listed for the business day. However, retail rates have a higher markup compared to ETFs. 

How do I invest in Gold ETFs?

Gold ETFs are traded and listed on the NSE like any other company stock. It is a cash market on the NSE, where you can buy and sell ETFs at market prices. To trade, you need a Demat account and a trading account with a share broker. You have an option to buy in a lump sum or through a systematic investment plan (SIP). You can therefore buy ETFs from exchanges (using an online trading account) or through a broker. You can even buy Gold RTFs from asset management companies.

Related: 7 Benefits Of Investing In Gold ETFs

Who is eligible to invest in Gold ETFs?

You need to have a Demat and trading account to trade in Gold ETFs. You also have an option to buy 1 kilogram of gold (and in multiples) from a fund house if you have a basic Demat account. 

What are the costs involved in buying/selling gold ETFs?

There is no entry or exit charge attached to trading in Gold ETFs. However, some costs might accrue, such as (a) expense ratio to manage the funds, which is typically around 1%, (b) brokerage for the service rendered, and (c) tracking error, which is not strictly a charge but can impact returns. 

What is the gold price prediction for the near future?

There are a number of factors and everchanging variables that impact gold prices, and there is no definitive way of ascertaining how gold will move. Different experts have varying opinions on the bullion price trends for the medium term. However, most expect the immediate prices to remain muted. 

As per Fitch Solutions, the ramp-up in vaccinations, rebound of global economic growth and strengthening US Dollar will keep gold prices steady with small bouts of volatility. Fitch expects gold prices to hover around US$1700 per troy ounce (oz) till 2022. 

They expect an increase in bond yields which will further weaken gold prices through late 2022 and early 2023, going as low as US$1600 oz. A positive trend thereafter could see gold scaling up to US$ 2500 oz. by late 2024.

Conversely, Diego Parrilla, who manages the US$ 250 million Quadriga Igneo Fund, is extremely bullish on gold, expecting the prices to touch US$3000 - 5000 over the next three to five years on account of the damage that is expected due to imprudent monetary and fiscal policies and poor assets built on artificially low interest rates, which will highlight golds value as a hedge.

Conclusion:

With a better understanding of what works best for you, you can now begin your journey of investing in gold. With the proper documents and the eligibility criteria in place, you should be ready in no time.

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