Unlocking the Secrets of Gold Investing: A Deep Dive
Hello Long-term Squad,
Did you know in the last 20 years Gold has generated 11% CAGR in INR, but only 9% CAGR in USD?
Yes, that is because Gold is globally priced in USD, and any fluctuation in the exchange rate between the INR and USD directly impacts the cost of gold in India.
When the INR weakens against the USD, the cost of importing gold rises, leading to an increase in the local price of gold. Conversely, a stronger INR can make gold relatively more affordable. Therefore, keeping an eye on currency dynamics, especially the INR-USD exchange rate, provides valuable insights for savvy gold investors.
Having said that, historically, every year INR depreciates around 6% compared to USD which directly benefits Indian investors who invest in gold.
But is it important to have Gold in your investment portfolio?
The most successful and respected investor in the world, Mr. Warren Buffett has different views on gold investment.
He says, “Gold is a 0% earning asset, it neither pays dividends nor an interest.”
Also, I will share some of the comments of Mr. Buffett about gold investments below.
“Gold … has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end”
“I have no views as to where (gold) will be (in the next five years), but the one thing I can tell you is it won’t do anything between now and then except look at you”
“(W)ith an asset like gold, for example, you know, basically gold is a way of going long on fear, and it’s been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn’t produce anything”
However, the price of gold is only dependent on demand and supply.
But gold is considered a hedge against inflation. Plus it has historically appreciated during times of market turbulence.
And that’s why looking at the historical price appreciation of gold, I feel it's the reliable anchor your portfolio needs when financial storms brew.
How much allocation of Gold should be there in the portfolio?
Here's a golden rule: Your age divided by 2 should be your gold allocation. For example, if you're 30, allocating 15% of your portfolio to gold is ideal. This rule provides a sensible guide to balance risk and reward in your investment strategy. But know that it is not a thumb rule and personal finance is called as personal finance because it is personal. So you can modify this rule according to your risk appetite and expected returns.
What is the best way to invest in Gold?
Let us first discuss the worst way which is buying physical gold or jewellery. High making charges and the constant threat of theft make them less appealing options according to me.
A smarter approach – invest in Sovereign Gold Bonds (SGB). Not only are they safe and come with a sovereign guarantee but they also offer tax benefits.
Why do I choose Sovereign Gold Bonds (SGBs) over traditional gold investments? Here's why:
Safety and Convenience: SGBs are issued by the government, making them one of the safest forms of gold investment. No worries about storage or theft.
Earn Interest: Unlike physical gold, SGBs pay an annual interest of 2.5%. Your gold investment not only grows in value but also generates a regular income stream.
Capital Gains Tax Exemption: If you hold SGBs until maturity (8 years), the capital gains on redemption are tax-free. This tax advantage adds to the overall returns on your investment.
Easy Liquidity: SGBs are traded on stock exchanges, providing liquidity. You can sell them on the secondary market if you need to liquidate your investment before maturity.
No Making Charges or Wastage: Traditional gold purchases come with additional costs like making charges and wastage. With SGBs, you invest in pure gold without these additional expenses.
You can directly buy SGBs through Zerodha, a leading online brokerage platform, that offers a seamless way to invest in SGBs.
As we conclude our conversation about gold investments, remember that the world of finance is as dynamic as it is rewarding. Gold, with its timeless appeal and strategic advantages, stands as a beacon in the realm of investment.
We've uncovered the intricacies of gold pricing, explored the remarkable performance of gold over the years, and highlighted the smart choice of Sovereign Gold Bonds (SGBs) for your portfolio.
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Thank you for being part of this enriching conversation. Your financial success is our shared goal.
Best Regards,
Pratik Chauhan
Yeah. This provided a detailed insight into the topic.