In today’s world, with its plethora of options to invest one’s money in, gold is kind of a forgotten commodity.
R MAHADEVAN | SEETAL R IYER
Simple question: Should one invest in gold? Or, why should one invest in gold?
The simple answer would be that gold is the one universally accepted thing of value. Throughout history and all its vagaries, gold as a precious metal has held on to its stature. Andrew Carnegie refers to it as something that is “not first made valuable by law and then elected to be ‘money’.” Or, as more succinctly put by J P Morgan: “Gold is money. That’s all.”
When we talk about investment, we are seeking a means to grow our wealth. We essentially bet on something to grow in value, and own part of it, so that we too get to share in that increase in value.
In earlier days, there were constraints where avenues of investment were concerned. Shares and mutual funds, though they have been around for quite some time, have till recently been for the few. We are talking about a time when banks and bank accounts too were alien concepts for most people. Where firm value, liquidity and portability were concerned, the precious metals were what people turned to. Immobile assets, of course, were almost solely in the form of real estate.
In today’s world, with its plethora of options to invest one’s money in, gold is kind of a forgotten commodity. People with a heightened sense of adventure and with enough time and money to spare tend to go with shares. Those a little lower on the scale as far as the mentioned qualities and quantities are concerned, tend to settle with mutual funds. People looking for steady returns that are not dramatically affected by everyday changes in the world around, look to assured returns from instruments such as fixed deposits. At the back of it all, of course, people do invest in real estate, which works both as investment and also as a practical asset that provides shelter.
So, in today’s world, where does gold figure in the middle of all this? Let’s step back a little and look at the history of gold, and interesting one.
For centuries, for millennia, gold has stood for money in some way or the other. It has been the primary means of denoting value. We are here not talking about other commodities that have been used as money, such as animals, tobacco, or cowrie shells. Interestingly, as a sidelight, the word ‘pecuniary’, which relates to money, comes from the root ‘pashu’, meaning animal or cow.
The gold standard had been in currency in some form till a few decades ago. Initially, currency in the form of coins were issued in gold, silver or copper, with the value of the coin denoting the metal and the amount in the coin. Later, the gold standard came to be associated with paper money. In this case, people, rather than store their gold at home, deposited it with institutions, and were issued with currency notes. These currency notes were essentially promissory notes, with the issuer of the notes promising to pay the holder the equivalent amount in the form of money, or gold. In the case of central banks like the Reserve Bank of India, when it releases currency notes, the idea is that it is issuing these “promissory notes” against its stock of gold. When a central bank issues more notes than the value of gold it holds, this results in inflation, with the value of the currency note going down to the level where the total value of the circulating paper money equals the value of the gold the bank holds. Today, the gold standard is perhaps remembered by its absence.
Let us look at where gold might stand as an investment now. Even though people don’t look at gold actively as a means of investment, they still continue to buy the metal in the form of jewellery. This is true especially of India. This however, is not investing in the true sense because there is loss of value right through the process of acquiring or later selling this gold in the form of jewellery. Gold as investment would apply more to raw forms of the metal, in the form of coins, biscuits, or ingots.
In a stable and active economy, gold is going to appear somewhat comatose. But it also moves inversely to other more volatile avenues of investment. In that way, gold acts as a hedge. Whenever there is uncertainty people tend to flock to gold. So, when the stock market shows unsteady movement or when it falls, gold prices tend to move up. Similarly, when currency loses its value through inflation, gold firms up. In a scenario where currency devaluation is continuous and not an aberration, like it happened at different times in Brazil, Russia or Greece, gold becomes a way to maintain the value of one’s assets.
Gold also has sentimental value, similar to real estate. In the traditional world, people tend not to easily sell their gold, unlike, say, stocks or mutual funds, or closing their fixed deposits. They would rather pledge it and wait for the time when they can redeem it. In a weird way, this also helps people get through bad times – they will wait for things to go real bad before they part with their gold, meaning also that a holding in gold can help change people’s fiscal behaviour for the better!!
In today’s scenario, however, among the younger generation, this sentimental approach is seen increasingly less.
There is a wide range of views regarding adding gold to one’s investment portfolio. There is a point of view that gold is not a meaningful investment, as Warren Buffett stated quite categorically about 10 years ago. If you are anyway going to look at long term investment, according to him and also going by statistics, stocks will give better returns. For the short to medium term, equity mutual funds do provide better returns in a strong economy. Over the past couple of decades, in the age of equity and mutual funds, gold has given slightly lesser returns than market related instruments.
However, there is another school of thought that says gold is definitely worth considering because of its unique qualities. Primarily, it works as a hedge against inflation and uncertainty. So, when everything else is looking dodgy, gold tends to stand up to be counted. This is useful, especially for people who can’t afford to take risks, since some of their investments will be protected.
But even here, the general consensus is that one should allocate only a small percentage of their investment portfolio to gold, as a safety net. This would be similar to investing in government bonds, which act as a counterweight to the stockmarket. The recommendation is that anywhere up to but not more than 10 or 12 percent of one’s holdings can be in gold.
The short and obvious list of advantages of gold would be:
First, As a counterweight to other instruments – Like we have already mentioned, gold tends to hold its value when other assets show weakness. So, a small allocation to gold can be a good hedge. Gold also acts as a hedge against inflation in general, holding its value, and hence gaining in value relative to a depreciating currency. Also, it is always a good idea to diversify one’s holdings across many asset classes. It is generally not advisable to put all the eggs in one basket. So, mutual funds, equity, bonds, real estate… gold… it is better to have a little in everything.
Second, gold provides immediate liquidity. In case of an emergency, and especially for those who wouldn’t want to use the expensive option of withdrawing money with their credit cards, gold can be turned into cash almost anywhere and almost anytime. Though this seems an unlikely scenario, a stash of a little gold can be helpful!
Third, for those who are comfortable with tangible assets and the safety that they represent, gold is a good option. It gives one the comfort that “this is mine”. The fact that this, increasingly, reflects an older mindset, doesn’t change the underlying idea! In this, gold is similar to real estate - the age-old idea that this would provide for me, feed me, in the worst possible moments of my life.
There might be more, nuanced, reasons why one might want to invest in gold. And there are many ways to invest in gold for those who want to make it part of their portfolio. For those looking to invest in gold for a specific future event – like, say, a marriage – one way would be to follow the SIP principle. In SIPs, or Systematic Investment Plans, you put a certain fixed amount of money into a mutual fund of choice every month so that it all adds up, and also works towards spreading risk. There is a person who, for the last couple of decades, has been buying a gram of gold every year, and then forgets about it.
People are sometimes concerned about problems with storage of a hard asset like gold, since there is no ownership that can be established through document. So, theft is a real fear. However, these days, there is hardly anyone who doesn’t have a bank locker where they store their documents and tangible assets like jewellery and heirlooms. Storage, therefore, shouldn’t be too much of an issue.
Another way to invest in gold is through sovereign gold bonds. This comes with restrictions, of course. The money is locked in for a certain period of time – five years, to be precise – before it can be withdrawn. So, to that extent immediate liquidity is affected. However, the advantage is that there is no premium attached – the price is almost the same as that of the gold that you buy in the market. Besides, you get interest on your investment, even if at a nominal rate. Another advantage is that gains are exempt from tax. Do look out, though, for any change in policy that might affect the status. There is a further disadvantage in that the primary market is not always open. The government will intermittently sell bonds. If you want to buy at other times, it will have to be through the secondary market at prevailing prices which would fluctuate according to supply and demand. There is also a small charge associated with asset management by the agency you invest with.
However, otherwise, it would operate in the same way of regular buying gold, as a systematic investment, except that it does not put physical gold in your hands. When you need the metal, you will still need to buy it!
There are also exchange traded funds, where you deal with gold as you would with other traded instruments. Here, too, charges are applicable. Also, the same requirements, such as temperament, attitude and alertness, apply as they do to investing in, say, equity.
All told, there are advantages and disadvantages associated with investing through either physical gold or through bonds and funds; it is up to one’s inclination.So, there we are! Gold is surely worth thinking about as an investment option, but whether you want to go ahead and put some of your money in it depends on what your expectations are, what kind of returns you are looking for and the level of risk you are willing to take, and what level kind of assurance you are looking for in terms of returns. As a general rule, do put some time into studying a little more about gold and investing in general, and identifying your own investor profile. You might end up thinking gold is not too old!