The Centre has come out with its new series of the Sovereign Gold Bond (SGB) scheme open from June 19 to June 23, 2023, thus, triggering a renewed interest among gold investors. Falling markets have triggered fear among investors who are slowly redeeming their investments to shield their their money from losing value. Apart, the news of an imminent renewal of the Russia-Ukraine war and the resulting possible de-dollarization has prompted more people to allocate a greater portion of their earnings to gold and silver.
No doubt, we must have some amount of gold in our investment portfolios. However, the quantum of gold depends on how we interpret our finances, risk appetite, and our understanding of financial goals. Throughout history, gold has consistently held its status as a highly valuable asset and a reliable store of wealth. Although the level of interest in gold may vary among investors, influenced by market conditions and prevailing investment trends, numerous reasons exist as to why certain investors perceive the inclusion of gold in their portfolios as advantageous.
One may invest in this shiny yellow metal by putting their money in gold exchange-traded funds (ETFs), gold mutual funds, gold bullion, or through gold bonds. Myriad factors like investment tenure, storage capacity, liquidity, and taxation help decide how we wish to invest in gold and for how long we wish to stay invested in the same.
How much gold should you hold?
Many investors are unsure about how much gold they should buy, the reason being the inability to benefit from immediate cash flows. Unlike shares that you can buy and sell at the click of a button, you cannot just rush in to buy or sell gold at your ease.
Amongst all this contemplation surrounding gold investments and the factors affecting them, the question that continues to be unanswered is how much gold is worth our investment.
Basavaraj Tonagatti, a certified financial planner (CFP), SEBI-registered investment adviser and a finance blogger at BasuNivesh, says, “Many assume that adding gold will create a well-diversified portfolio and a hedge against inflation. However, if you look at the past data, even though there is a negative correlation between equity to gold, this comes with volatility risk equally like the equity market. If we consider gold as a hedge against inflation, the correlation between inflation and gold price movement is very low. Hence, I strongly suggest staying away from considering gold in investment portfolios.”
This again brings us to the most pertinent question regarding allocating the right amount of gold to our investment portfolios. How much gold should one have in investment portfolio? Should it be more, less, or equal to equities or equivalent to one’s debt component? While many investors stick to the five to 10 per cent gold investment rule, new-age investing may necessitate a higher allocation to gold.
D Muthukrishnan, a Chennai-based certified financial planner, explained, “Ideally gold should be 5-10 per cent part of one's asset allocation. It’s a hedge against inflation. It's a bet on the US dollar. Conventionally, Indians have always owned gold and it has provided superior long-term returns. Indians have always been used to owning gold despite volatility. So, we have the right temperament to own this asset class.”
Is this the right time to buy gold bonds?
Valuing gold can be difficult. Unlike stock prices that depend on market conditions and companies’ performance, there is no particular factor that determines gold prices. Moreover, gold prices are influenced by the demand-supply dynamics in the market apart from myriad factors like financial crisis, geo-political issues, etc. This also means that gold prices may remain relatively the same throughout unless triggered by factors accompanying high volatility.
Gold has often been criticized for its intermittent performance, where it remains stagnant for extended periods and then experiences sudden surges that significantly boost its long-term average returns. Similar to equity investing, timing plays a role in gold investments as well. If one wishes to time their gold investments, it might be prudent to accumulate it during years or periods when it hasn't delivered exceptional returns or if you are contemplating factors like the sudden onset of a war or situation affecting the value of the dollar.
Viral Bhatt, Founder, Money Mantra, shared, “SGBs offer a more efficient, lucrative, and economical mode of holding gold compared to physical gold. Not only are SGBs a productive asset earning interest, but they have the additional benefit of a sovereign guarantee. Gold tends to outperform other asset classes when there is economic flux, geopolitical uncertainty, or a debasement in the value of fiat currencies. Gold is regarded as a safe-haven investment in such uncertain times and hence elicits a lot of demand. An investor needs to keep this in mind.”
“Lastly, any decision to invest in gold has to be seen within the framework of your overall portfolio mix and long-term goals. Normally an exposure of 8-12 per cent gold in the portfolio may be ideal to give the safety net to your portfolio in uncertain times. However, one needs to remember that, unlike the equity market, gold does not create long-term wealth. That should be the broad philosophy that should ultimately drive your gold investment decision,” added Bhatt.
Setting aside a part of your earnings in SGBs may help you avail yourself of some tax-free earnings in the long run. However, it may not be in your best interest to buy a lot of gold in one go. Also, not all money must be put in SGBs. Some may be put in gold ETFs too to ensure liquidity if required as opposed to the idea of having the investments redeemed only after the predetermined tenure.
Dev Ashish, a SEBI-registered investment advisor and founder (Stable Investor) said, “For long-term portfolio diversification, 5-15 per cent allocation to gold can be considered. But the choice between physical, ETFs, and bonds will depend on the individual’s preference as well. While physical gold is a favourite of us Indians due to historical and cultural reasons, it does come with some challenges like quality, security, storage, etc. If one looks at gold purely as an investment (and not as a consumption item like one to be used as gold jewellery), then at least some gold allocation can be made to non-physical gold avenues as well.”
Ashish also explained, “Gold ETFs and gold bonds have no issues like physical safety and storage issues. Also, the SGBs earn an extra 2.5 per cent interest income when combined with the fact that the gains from SGB when held till maturity are tax-free, making SGBs a solid and tax-efficient way to invest in gold. Gold ETFs have the benefit of better liquidity as they can be bought easily on exchanges, but due to the recent changes in non-equity instrument taxation, gold ETFs are no longer that tax-efficient.”
Liquidity matters for some investors, while others may be willing to hold their investments for a prolonged period. Ashish added, “If you are planning to use gold as a tactical part of your portfolio which you will regularly buy and sell, then you need to value liquidity more and look at ETFs as well. But if you are investing for the long term and are sure that you won’t need to exit before 8 years or so, then SGB may be a better option. That is not to say that there is no role of physical gold in a portfolio, but given the need for gold as a pure investment (and not consumption), the allocation to physical gold in a long-term investment portfolio should be limited.”
In the end, it is all about gold. As said by the much-acclaimed Canadian businessman and serial investor, Kevin O’Leary,