Gold as an Investment Option in India

I’ve been hearing a lot about gold as an investment option in India these days. Some say “Gold is not a good investment option in India” or “Gold is the worst investment” while some says “Gold is the safest investment”. Some says “Gold is never old” or “Gold has been the best investment option and have passed the test of time”. However, some says “Gold is not a good option anymore in India since launch of mutual funds and PPF”. Which one should we believe? How do we identify what gold as an investment is in the Indian market and what is the future of gold?

I’ve kept it detailed yet easy for you to understand in this article about the concept of gold as an investment option in India. Once you read this, you will have a clear idea of where gold stands from investment point of view.

Ready? Let’s get started!

In short, gold is not a good investment and gold is not a bad investment either. In fact, it is not an investment at all. Gold is just a commodity/goods. Like any raw material that we purchase for household uses.

1000 years ago, 10 gm of gold could buy you a beautiful dress for your wedding. Today, the same 10 gm of gold can buy you a wedding dress. 1000 years in future, it is going to do the same. Nothing more, nothing less.

At the end of the day, if you buy gold then you’re not investing; you are just trying to keep-up with inflation.

Let me explain.

Out of several household needs like water, wheat, rice, cotton, gold, etc. Gold is a non-perishable item and you can keep it forever without its taste or functionality getting damaged. You can store it for years; it consumes less space and can be used as a medium of exchange anytime.

Hence if you have a lot of money and no clue what to do with it, buy gold. If you live in a country with no other modes of investment, buy gold. You sense a risk of recession, war, inflation then buy gold.

Yes, the price fluctuates, but in general, gold holds its value in long run. The pricing is not manipulated by the government; not managed by a CEO, and it does not have a ‘lifespan’ like any other assets.

Another advantage of gold is the fact that the supply is limited and it has a strong demand from investors in times of market stress. Even if the price of gold soars, the market isn’t able to go out and mine gold the way it can pump more oil or print more notes.

Advantages of buying Gold:        

1. Great option to keep up with inflation.
2. Gives better return during the time of market crash and recession.
3. High liquidity as it can be sold any given day.
4. Second best globally accepted method of exchange after currency.
5. Strong stable demand globally.

If you’re already rich, it can keep you rich.

It doesn’t do anything but sit there and look at you.

-Warren Buffet

If you want your wealth to grow & multiply, keep reading

We all know that printed currency has no actual value. You can’t eat it, you can’t drink it and you can’t use it to build houses or cars. In case tomorrow our Prime Minster declares that all the paper money is to be stopped and we get a complete new type of currency only for the amount we had in our bank account. Then all the so called money you had in your wallet and home locker will be of no use (I know government wouldn’t do something like this, I hope so).

However, the currency we use has got value because we all agree to use it as a medium of exchange.

Let’s take an example of wheat. It does have an intrinsic value, because you can use it to make chapatti, bread, cookies and all kind of delicious and healthy food. Wheat has its value because people need it.

What about gold? Industries need it for jewelry, electronics, medicine and many more purposes. However, is that the real reason for its high price? Certainly not. Gold cannot be produced manually since its obtained only from mines hence its limited in this world.

Are you a gold trader?

During the times of crises, people withdraw money from stock and invest in alternate investment class and gold is one of them. Hence we learn that gold has lower correlation to stock market.

Which means when the price of shares go up, gold price reduces or remains stagnant for years. (Because majority of the money is pumped in equities and mutual funds). When the market crashes, gold price jumps suddenly.

This proves that the gold price is not dependent on its own use or natural demand (intrinsic purpose) but its heavily influenced by external factor. If you want to study the future price movement of gold then you need to study all those external factors such as stocks, inflation, government regulation, world trade, etc.

If you are excellent at identifying the stock market crashes early then you can rather make billions from stock itself.

“I made a ton of money investing in gold, it’s a good investment!” – He said. “Congratulations!” – I replied. “I myself made money playing Blackjack last time I went to Goa, but I wouldn’t go around telling people that I’m a great investor” (or even a good gambler if I’m being honest).  

Anyone who bought gold at the start of 2000 and sold it in the early 2010’s got a nice profit but they never had any idea on how much return gold was going to give before investing. It was a pure luck because of several market crashes.

Now let’s look at some numbers

I’ve done an in depth analysis of gold price vs Sensex (click here its a must read) from 1980-2020 and also for difference time range and concluded that Sensex gave us a return of above 15% annually (compounded) whereas gold has only managed to give return of 8.43% annually (compounded) in the same period.

Even the World Gold Council website (www.gold.org) have done analysis and research over various time periods and have recommended to include Gold in your portfolio to only about 3% – 9%.

The simply reason is because if you’re investing for long term (5 to 7+ years), you’re able to get much better return through stocks or mutual funds. On the other hand, if you wish to invest or park fund for short term (less than 5 years), you have a better option of parking your fund in liquid mutual fund (which guarantees capital protection). Because gold price also fluctuates wildly and you might have to sell it at lower price in a few year period when you need the cash urgently.

Conclusion

Average inflation rate in India is about 6-8% annually hence Gold is only used to beat inflation and diversify your portfolio in case you need funds during the times of crises. Should you increase your investments in gold then you’re missing on potential opportunities to get better returns by investing in other better investment sources.

If you still want 8.5% annualized return then you have better options available such as PPF, NPS (tax-free) or fixed deposits, bonds etc which offers guaranteed returns. Or if you’d like to gamble in gold by purchasing it for short term (which I don’t recommend) then you have better chance in share market.

The magical metal is no match for the American mettle.

-Warren Buffet

Little do we know, Indian economy is growing at a much faster pace then the American economy and any other economy in the world. This is the best time to invest in equity related instruments to be a part of this high growth period. Or else ignorance and lack of risk taking mentality will cost you more than anything else in the long term future.

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