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When does investing in gold make sense?

May 07, 2019 12:01 IST

People who have no access to or do not trust the financial system are the only ones for whom investing in gold makes sense, says Naval Goel.

Should you buy gold on Akshaya Tritiya?

IMAGE: Buying gold may not be the best investment, says Naval Goel. Photograph: Sucheta Das/Reuters

India has always been a country that is partial about the ancient ways of doing everything.

We trust the existing ways and the things that our ancients used to follow or do, other than what today’s market say.

Same is about gold.

If you ask your previous generations about the investment of money, they will surely say that a passive investment in gold is the best possible way for that, as it is an asset for tough financial times and every household should invest in it.

Opinions about buying gold in India were always polarised.

People think that gold is easily bought and easily liquefied asset that can be relied upon.

Another view about the same is that gold is a commodity to be traded like other commodities.

This view is taken by punters and traders but is the least relevant to the individual saver.

If you talk about the current scenario of the market, gold is certainly an investment, but not the best one.

The returns are poorer than other investments and there are also fundamental reasons why this will always be the case.

Why it's not a good idea to invest in gold

Gold is considered the kind of investment that will never produce anything, which is the reason why gold cannot be an investment.

It is an unproductive asset.

Logically speaking, the growth of any investment is based on the belief that someone else will pay more for the investment you make.

The money that you invest in gold does not contribute to any kind of economic growth, unlike shares or bonds.

No matter how much time passes by, a pile of gold will stay the same.

Any other productive economic activity or an equivalent amount of money deployed in a business will always generate actual wealth and will grow larger in a very fundamental way.

Some industrial applications contribute to a small part of its production but this demand plays no role in its price.

The fear that other asset classes will lose value is what drives the value of gold.

There are plenty of other reasons why you should not invest in gold.

For example, you should avoid investing in gold if you have access to a modern financial system which allows you access to a large variety of asset classes.

People who have no access to or do not trust the financial system are the only ones for whom investing in gold makes sense.

Who should invest in gold?

Gold is best viewed as an alternate currency.

Remember demonetisation?

For instance, one should remember the instances at the time of demonetisation when people secretly squirreled away large amounts of cash.

There were people who had kept more than Rs 10 lakh cash as safe deposits in their houses.

This was a rare situation in which gold would have worked better instead of cash.

It would have maintained value better than cash, and as it turned out, would have been safe from being demonetised.

Investing in gold is often an excuse to save up for bad times.

There are many parts of the world that have undergone some kind of upheaval in the past 100 years that has led to a breakdown of society and institutions.

The benefit of keeping physical gold is that it can survive in extreme cases where paper currencies do not. It is somewhat better in ways than actual currencies.

Interestingly in India, physical gold has served yet another purpose -- that of keeping wealth away from taxation.

Remember November 2016, when PM Modi suddenly declared demonetisation?

In the immediate house after the declaration, the crowds that materialised at jewellery shops are a testament to this.

In fact, experts even say that, in India, the purchase of large amounts of gold is mostly limited to those with cash to hide.

Alternate investment

If you really believe in gold and are unable to overcome its lure, there are modern, trouble-free forms of ‘paper gold’ available.

Have you heard or read about gold backed mutual funds?

These are the mutual funds that are available from many fund houses that closely track the value of gold.

Also, the government of India's gold bonds is a great option if you don’t mind locking money away for up to eight years.

The value increases with an extra interest of 2.5 per cent per year.

Additionally, the gains from the gold bonds are tax-free, unlike gold mutual funds.

With a 2.5 per cent per yearly bonus, this makes the investment the exact equivalent of holding gold.

Think before investing

While it may be hard for you to believe and accept that gold is not a good investment, you must remember the risks that come with it.

Gold is certified as a currency that survives all the vicissitudes of history and economics by thousands of years of human culture, but we can say it's not without a reason.

If you were to rationally analyse the growth of gold over the last few years, it will all make sense to you.

Always consult an investment expert before investing in a traditional or popular method.

Always remember 'change' is the basic nature of everything that exists, and this applies to investment patterns as well. 

Think well before you put all your savings in a dead investment.

Naval Goel is founder, CEO, PolicyX, an online insurance aggregator.