For ages gold has been considered as safe heaven. Last year we witnessed US- China trade war which paved way for slowdown in the world economy. Add to that problem of Corona emerged as a big challenge. Huge disruption has been caused in the world economy by the Covid -19 pandemic. Now we are witnessing more accommodative monetary policies from the major central banks.
Traditionally gold, US Dollar, Sovereign Bonds and FMCG stocks have been known as safe heavens. As a natural outcome of Corona virus pandemic, investors are looking for alternative safe-haven assets like gold. Huge inflows are witnessed in gold investments. Any asset which passes the litmus test of safe heaven, it has to have salient features of having long term and universal demand, limited supply and ability to convert in to quick cash. Gold passes all these tests being fully liquid asset, being scarce commodity and having continuous demand. No central bank decision can influence the price of gold by infusion in the supply like currency notes. In fact many times Central Banks buy gold on behalf of government. Gold also known as yellow metal has kept its glitter, radiance and beauty for centuries
Indians love to possess gold in physical form be it a chip, coin or jewellery. Holding gold in physical form has its disadvantages. Apart from risk of holding and making charges the design may lose its’ sheen being old fashioned. Gold has swung sharply in certain years and has remained stagnant during many years.
In a way gold as an asset class tests investors’ patience. If you compare the returns on the gold in the last six to seven years, you will notice that gold has given virtually no returns, until we saw a big surge in the last few months. Gold has given phenomenal 40 per cent returns in such a span of one year. SIPs with longer duration in gold have not only protected the capital but also has given great fillip overall portfolio. Gold crossed barrier of Rs 50,000 per10 grams and with the current uncertain situation of Corona virus and impending US elections experts are predicting gold to cross Rs 80,000 per 10 grams soon, indicating huge upside. Current price of Gold for 10 grams is around 51,000 to Rs 54,000 .
One of the best option to invest in gold is sovereign gold bond In April 2020, Reserve Bank of India announced Series-I of the sovereign gold bond (SGB) scheme for 2020-21. RBI is issuing such bonds every month till September 2020.For series I it offered 1 gram of gold at Rs 4,639 per gram, with Rs 50 discount on a purchase made online. Minimum investment for such scheme is one gram of gold while maximum limit of subscription is 4 kg for individuals, Hindu Undivided Family (HUF) and 20 kg for trusts. Big advantage of such scheme is that not only you gain from the appreciation in prices of gold but an interest at the rate of 2.5% on the investment is also earned. The tenure of the bond is for a period of 8 years with an exit option available to the investors in the 5th, 6th and 7th year. Redemption of the bonds is linked to average closing price of three working days from the date of repayment. These bonds are held in demat form and are traded in the secondary market. Such bonds mitigate the risk and cost of storage and are exempt from capital gain if held till maturity. Investors can invest in this scheme till September 2020. From the month of April 2020 till August 2020 the price of Sovereign Gold Bond Scheme 2020-21 has moved in the range of approximately Rs 4550 to Rs 5330 per gram of gold. Another two months are left for the investors to grab this opportunity.
Another form of holding gold is through Exchange Traded Funds commonly known as ETFs. Gold ETF is a mutual fund product where units are issued against physical gold held in custody of the designated custodian. Mutual funds invest in gold and such physical gold is held by the custodian. Marketable units are allotted to the investors and a unit of ETF is earmarked as one gram of gold. The units are also held in demat form. For arriving at NAV gold ETFs charge expenses which results in reduction of returns as compared to Bonds as compared to Gold bonds.
Due to huge wealth creation, traditional preferences over period demand for gold is increasing from the emerging markets as compared to western countries. When the Bull Run in Equities is on, gold takes a back seat, whereas uncertainty in equity results in surge for demand for gold. But returns in gold lack consistency and it is very difficult to project or forecast. Perseverance and patience pays when it comes to this yellow metal. Sanskrit scholar and one of the greatest playwright and poet, Great Kalidas, had said “The purity of gold can be tested only when it is put through the fire”. But experience teaches us that investing in gold is in no way playing with fire.
MR. UDAY TARDALKAR
CORPORATE CONSULTANT AND TRAINER