Updated: Nov 13, 2020
The article includes all the things you need to know about gold investment. Try to keep up till the end and you’ll get your answers.
Data shared in this post is from authorized sites/ sources and none of these are made up or mendacious. This post includes data from news, interviews of respective field experts, books, and my experience.
1. Why gold value is increasing?
2. Why invest in gold?
3. Is gold investment safe?
4. History of returns on gold investment
5. How to invest in gold?
6. When is the right time to buy gold?
7. How are tax applied on the gold investments?
Currently gold is all over the news and every investing sites are focused on it.
Gold is precious metal everyone wants to get hold of and has many uses other than jewelry for example in electronics, electrical wiring, dentistry, medicine, radiation shielding, and in coloring glass.
So, let’s get to the point;
Why gold value is increasing?
There are multiple factors that affect gold price, currently it is the recession and recession has a great effect on the gold price.
In the recession, the market faces bad condition, incomes fall, unemployment increases, returns, and interest rates fall, the flow of money in the market slows down and specifically the value of the currency drops.
In this condition, people tend to buy precious metals especially gold to preserve the value of their money, most probably because gold is low risk investment and people don't want to take high risk in recession. This increases the demand for gold and its value rise.
That means, stronger currency keep value of gold lower and as the currency weakens gold value starts increasing.
In general, change in supply and demand can cause a change in the value of the gold.
But other than that, the cost to mine gold is also a factor to increase its price. Easy to mine gold is already been mined and now we’ve to dig deeper to get quality gold and with it cost to mine is also increased.
Unlike the stock market, gold value does not depend on the profits of the company and revenues. But if gold mining companies like Barrick Gold Corp. and Alacer Gold Corp. are doing badly, which can cause gold prices to go down as a result of lowering the supply of gold in the market.
Also lots of electronic companies requires gold (like the parts in processor, microphones, etc.), so increased manufacturing of electronics can increase demand of gold and in return the value of gold.
India is one of the largest gold-consuming nations in the world.
In fact, Bloomberg reports that global central banks are buying the most gold since the U.S. abandoned the gold standard in 1971. In all, governments bought a total of 651 tonnes of gold in 2018, according to Bloomberg.
That means supply will only go up, and if you look at the history, demand is also increasing over time.
Why invest in gold?
When more currency is printed by central banks to increase cash flow in the market, it may cause higher inflation in the market which tends to lower the value of the currency.
As gold cannot be printed by central banks, it is obvious that the value of gold will not affect.
Also when central banks lower the interest rate, your fixed deposits and other instruments also yield lower returns. But if you hold gold in your portfolio it can give you more return in the inflation, that’s why gold is called ‘Inflation Hedge’.
In the commodity market, oil, coffee, etc. are consumables, means as their supply continues they are constantly consumed by consumers and degraded to by-products and these by-products may not be the same cost as its original form. But gold will remain in the market and in the all forms it values high.
As already said, gold does not depend on any company’s revenue, quarterly profits nor on any market index which makes it the best investment in a volatile market.
Is gold investment safe?
Gold investments are safe depending on how much percent of your portfolio it comprised of.
Actually gold investments are done to make you safe in the periods of recession.
To protect your money in the risky and volatile markets, you have to properly diversify the portfolio. The metals, especially gold and stocks should be properly combined as a safeguard against inflation.
According to experts 5 to 15% of your portfolio should be gold and don’t use gold as a primary asset.
History of returns on gold investment
Last 30 years, S&P 500 (performance index in the stock market in the United States) has risen to 1820%, 421% for global bond index and gold has risen around 225%.
And if you look at last 10 years BSE Sensex has appreciated by 130%, but gold has outdone it with 134% returns.
In India, last decade, gold consistently gave better returns than Sensex except in year 2013 & 2014, gold gave -4.9 & -8.2% and Sensex 8.5% & 29.6% respectively.
Bloomberg consensus estimated that gold prices could crash 10% in 2015. The government and the central bank also took steps in 2012 to discourage investors from buying too much gold.
According to Business Standard, “A stronger dollar due to uncertainty in global economic growth also weighed on the metal. With the tapering in the US central bank’s quantitative easing (QE) programme set to reduce the investible surplus in consumers’ hands, gold is set to remain subdued in 2014, too.”
After the financial crisis in 2008, gold price hiked to all time high of $1,900 an oz in the London spot market in August 2011.
As profit booking started picking up in both ETFs and individual households, it also increased the selling of scrap jewelry and gold began losing its shine.
In India, as the US dollar gained against rupee and gold prices lowered. And a rally in the global markets and political stability also slowed down the pace at which the price of gold rising.
In September 2011, gold reached its all-time high of nearly $2000 an ounce (1 ounce is equal to 480 grains or 31.103 grams).
As of July 2020, the price of gold is reached $1975 and increasing day by day.
In India gold price has crossed Rs. 52000.
How to invest in gold?
The most common way of buying gold is as coins, bars, and jewellery but the ‘paper gold’ makes more sense than physical gold.
To take the maximum leverage out of gold, gold mining stocks are a better choice than investing in gold bullion.
In India Shirpur Gold and Deccan Gold are good companies to invest in.
However, investing in gold-mining companies are not directly connected to gold bullion. Their stock performance depends on individual capital and profits.
ETFs (Exchange Traded Funds) are passively managed funds that invest in underlying assets and trade over stock exchanges. And they are bought and sold in the market hours like any other stocks.
You need to buy gold ETFs that are indexed to the price of gold and to buy or sell ETFs, you need a Demat account.
There are top gold ETFs in India like HDFC gold ETF, UTI gold, SBI gold ETF.
In the US, GraniteShares Gold Trust (BAR), Perth Mint Physical Gold ETF (AAAU), SPDR Gold MiniShares Trust (GLDM) are top 3 ETFs that are giving 25.2% and 31.8% returns.
SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as one of the world's largest holders of gold bullion in 2008.
SGBs (Sovereign Gold Bonds) are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
Gold bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorized stock exchanges either directly or through their agents.
When is the right time to buy gold?
Patience is important in the game of money but if you’re trying to find the right time to buy the gold or any other investment, it’s now or never.
”There are people who make millions every day and there are those who keep waiting.”
If you’re planning to do it strategically, buy it when the price of the currency is high because that time gold falls rapidly.
And history has proved that everything that goes up, will certainly fall down. There will be a recession every 25-30 years.
1. The great depression 1929-39
2. The OPEC Oil Price Shock of 1973
3. The Asian Crisis of 1997
4. The Financial Crisis of 2007–08
Also, I’ve found this great post on goldsilver.com,
How are tax applied to the gold investments?
In India, in case of physical gold, tax depends on how long you’ve kept the coins/ bars/jewelry. Also, you’ve to pay GST while buying it.
If you keep physical gold for short period (for 3 years or less than 3 years) then gain over this is termed as short term capital gain and added to your gross total income, and taxed at income tax slab applicable to you
If you hold gold for more than 3 years then capital gains are long term and taxed at 20% (plus cess if any).
Taxation on Gold ETFs and Gold Mutual Funds is the same as physical gold. That means their gains are classified the same as physical gold and hence taxed the same.
In the US, Gold is considered as collectible by IRS (Internal Revenue Services) and categorized in two terms, short-term and long term capital gain.
If you hold gold for less than 1 year then your capital gains are termed as short-term and are taxed as regular income. If you hold gold for more than 1 year then they’re termed as long term capital gain and taxed at 28%.
If you are in a federal tax bracket lower than 28%, your net long-term gains from collectibles are taxed at your regular rate.
Overall now is a good time to protect your money but try to be always on the safer side and don’t overdo it.
Speaking about the commodity market or any market, speculations never worked.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
― Benjamin Graham, The Intelligent Investor