As the monsoons spread around the country, we know that the festival season will soon be upon us. Before the rains are gone, there will be the Ganapati festival, shortly after that Navratri and Durga Puja and then the big one – Diwali. All this is congruent with the wedding season which typically runs from October to March.
Apart from the religious fervour and extreme levels of noise pollution that this entails, will come the rush to buy gold. That’s right, Indians do love their gold (we have been the world’s highest importer of gold every year since this metric has been tracked).
But beyond the demand for gold jewellery, we should think about whether gold is a good place to invest. After all, we no longer depend on gold as the only way to place our funds; India now has a thriving stock market, mutual funds have made it possible for retail investors to enter the market, and over the last two decades, property has emerged as another investment avenue.
Before deciding whether to invest in gold, however, consider the following points:
1. Compared to other tangible assets, gold is quite volatile. Prices tend to go in both directions over a medium-term period.
2. It is a good mode of diversification. Gold prices are not a strict counterweight to equity, but by and large tend to move in the opposite direction to stocks. This means keeping a portion of your savings in the form of gold can serve as a hedge against stock crashes.
3. There are multiple ways to invest in gold now, and you do not have to go for jewellery (with expensive making charges) and bullion, which entails a storage cost.
4. Gold is a very liquid investment, as any authorized jeweller will purchase gold. Compared to property, which can take a long time to realize, or even stocks, which have a three-day settlement cycle, Gold can be liquidated almost immediately.
5. Gold does not earn any passive income. Unlike property or stocks, which earn rent and dividend, of FD’s which earn interest, there is nothing to be gained from holding Gold. This has been somewhat changed by the launch of Sovereign Gold Bonds, which earn an income (though small).
6. Gold needs physical storage and insurance. Typically you would have to store your gold in a Bank Locker or if at home, you need to insure your home against theft.
7. Gold value tends to rise when there is devaluation of the rupee against the dollar. This means that the increase in the value of your money may have limited impact overall, but as an investor if you can detect an imminent devaluation, it is a good time to invest.
8. In India, sale of Gold is subject to capital gains tax, with short-term Capital Gain tax applicable for sale within one year, and long term capital gain tax at 20% of profit made for sale after that.
At the present time, investing in gold appears to make sense, with the stocks of gold mining companies rising consistently. The prices of gold are also rising, however they may spike around the time of the festival season, and with world markets in turmoil thanks to Brexit, it might be a good idea to get in on your gold purchases as soon as possible.