All that glitters…

September 26, 2015, Chennai

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Subhadra (Name changed) just signed up for my services.

During the discussions and data collection I realized that though she had been saving good money but all her investments were in apartment, fixed deposits and gold. She had been buying gold coins and gold jewelry. This is a typical portfolio that I have been observing in young women. The family too insists on accumulating gold for wedding and everyone presumes it to be a safe haven. According to the World Gold Council, India tops all countries in consumer demand for gold. 
The tradition of accumulating gold comes from India being an agrarian society. At every good crop the profits were converted into gold for the wealth to be preserved for posterity.  Quantity of gold jewelry on his women’s (read wife, mother, sister) body reflected the man’s prosperity. The assets that a man could create was only land and gold. In an agrarian society land was the major source of revenue and could not be liquidated in bad times. In the absence of a well-developed banking system; gold accumulated in good times was the only way to raise money in bad times. Land was usually owned and controlled by men whereas jewelry was usually under women’s control. Women were not involved in economic activities and their only source of financial security came from the gold they had. 
In last few decades the ground reality has changed. With the advent of technology muscle power is no longer the prerequisite to earn money. This gave the women, long awaited opportunity  to get educated and earn gainful employment. As a matter of fact gold ceases to be the sole source of financial security. But old habits die hard and the lack of knowledge of present financial system pushes women to invest in this idle asset. Over a period of time, this inertia hurts their goal of wealth creation and financial security. 
Data from the last 15 years will show how gold has performed as an asset class:

Subhadra (Name changed) just signed up for my services. During the discussions and data collection I realized that though she had been saving good money but all her investments were in apartment, fixed deposits and gold. She had been buying gold coins and gold jewelry. This is a typical portfolio that I have been observing in young women. The family too insists on accumulating gold for wedding and everyone presumes it to be a safe haven. According to the World Gold Council, India tops all countries in consumer demand for gold. 

The tradition of accumulating gold comes from India being an agrarian society. At every good crop the profits were converted into gold for the wealth to be preserved for posterity.  Quantity of gold jewelry on his women’s (read wife, mother, sister) body reflected the man’s prosperity. The assets that a man could create was only land and gold. In an agrarian society land was the major source of revenue and could not be liquidated in bad times. In the absence of a well-developed banking system; gold accumulated in good times was the only way to raise money in bad times. Land was usually owned and controlled by men whereas jewelry was usually under women’s control. Women were not involved in economic activities and their only source of financial security came from the gold they had. 

In last few decades the ground reality has changed. With the advent of technology muscle power is no longer the prerequisite to earn money. This gave the women, long awaited opportunity  to get educated and earn gainful employment. As a matter of fact gold ceases to be the sole source of financial security. But old habits die hard and the lack of knowledge of present financial system pushes women to invest in this idle asset. Over a period of time, this inertia hurts their goal of wealth creation and financial security. 

Data from the last 15 years will show how gold has performed as an asset class:

Most of my clients have a combination of gold jewelry and gold coins in their portfolio. The feel of physical asset makes them feel secured. A lot of them think that by not letting their savings erode they will be able to create wealth and safety net. They do not realize that in present day economy the smartest way to live the life is by making the money work for them. This will give them the financial freedom that they had been craving for. Gold will hardly serve that purpose. Gold in the form of jewelry is not an investment. It can be classified as a lifestyle asset that will not depreciate over time. In fact over the past two years even that has not held true, with the gold prices seeing a downward trend.

Does it mean women should not invest in gold! Not at all!

Gold as an asset class has its own place in any portfolio. Any portfolio should have 5% to 10% of its value invested in gold. It is good hedge against portfolio devaluation and a cover for inflation. There are various ways to invest in gold and jewelry is not one of those. Jewelry involves wastage and making charges which reduces the value of gold by 10 to 35 percent and therefore does not fit into an investment category. 

Below are few facts that one should know about these options of investing in gold:

 

  • Gold bar, coin or biscuit: One of the oldest form of preserving gold, bars are more cost effective than buying jewelry. Coins have become popular through banks selling them to their customers, especially in festival season. Remember - smaller the size of gold coin more expensive it is because of the making charges. The cost of keeping the physical gold safe should not be ignored. While banks sell you gold at a premium the RBI does not permit banks to buy them back. You will have to sell them to jewelers and get a lower price! Though bullion bars are a better form of gold to hold on, it’s minimum investment is higher than what a normal investor can think of. 
  • Gold ETF: Holding gold in the form of Exchange Traded Funds (ETF) has a huge liquidity benefit. Investors who want to accumulate on gold by investing in small amounts at regular intervals should use this option. These funds are traded on stock exchanges providing high liquidity to the investors.  Each unit of this fund is equivalent to 1 gram of gold. It is not only easy to buy and sell but also becomes very cost effective unlike the physical gold. Also the quality of gold is not a concern either. ETFs are regulated by SEBI, the supreme authority of capital market in India, thus ensuring transparency. However, one should be aware of the expense ratio within the fund which may be around (1%). 
  • E-Gold: These are similar to Gold ETF with few differences. Also, it is the only option which provides you with the facility to convert units into physical gold, while the prices remain the same as of gold ETF. This can be a good option if one does not mind managing an extra demat account. But unfortunately, e-gold would take time to catch interest of the public because of the NSEL scam.
  • Gold Funds: These are the mutual funds which most of the people are familiar with. They are broadly of two types – Gold Fund of Funds and Gold Funds. A gold FOF invest in ETF while gold funds invest in gold mining and associated companies. Gold funds do not give a direct exposure to gold unlike the previous two options. Their value is derived from the performance of gold mining companies rather than just the price of gold. Gold Fund of Funds carries higher expense ratio, thus defeating the purpose of investing in non – physical gold. Gold funds carry market risk, thus defeating the very purpose of investing in gold.
  • The demand for gold in the Indian market is predominantly for making jewelry. Jewelry as  a form of investment is a very poor choice. There are making charges and impurities which eats up into the value of gold. Every time gold changes form (from coin to jewelry to another jewelry), some gold is lost. Jewelry should only be treated as  a consumable which will not lose its value over time. It is not an investment. 

 

Gold is treated as any other asset when it comes to capital gains taxation. After indexation the quantum of long term capital gains tax will not be a huge amount; given the fact that in long term the returns are usually just above inflation. Local gold prices are also affected by wedding seasons and government policies on gold import duty. 

How much should you invest  in gold? Not more than 5% to 10% of your portfolio. It will give some hedge against inflation and not hurt the wealth creation process either. Gold for consumption can be in the form of jewelry. If you want to trade in gold and take advantage of fluctuations in the market then Gold ETF is a better choice. Also if you want to invest systematically in smaller amount gold ETF is a better choice. Gold bars are an option for investors who want to buy bigger chunks at one go. If you want to take advantage of the profitability of gold mining companies; opt for the gold funds. A well regulated and robust commodity market can open up the e gold for common investors in near future. 

Invest in gold, but be objective and don’t let your emotions or old wives tales influence your decisions!