Diversification Into Gold
- Since ancient civilization, from the Egyptians to the Inca, gold has held a special place of actual and symbolic value for humanity.
- Gold has moreover been used as money for exchange, as a store of value, and as valuable jewellery and other artifacts.
- Gold’s value is ultimately a social construction: it is valuable because we all agree it has been and will be in the future.
- The strategic case for gold is cantered on risk management and capital preservation. Gold offers investors a liquid asset that lacks credit risk and that provides diversification during good times and bad.
- During periods of market stress, gold is able to reduce portfolio losses by outperforming most other assets. It is also able to protect investors’ purchasing power through its ability to hedge against high inflation and currency devaluation.
- Risks to gold prices comes from the fact it has very little actual use other than perceived value. Storage costs can be a disincentive for very large investors.
- The Indian prices of gold can be broken down into three components
1. International prices of gold.
2. USD INR fluctuation (depreciation or the rupee. makes gold more attractive)
3. Custom Duties and other taxes.
The above chart provides the USD Prices of gold over the last 25 years. One can see gold recorded a significant jump post the 2008 crisis and peaked by 2012 as the crisis eased.
Subsequently we saw a very flat movement of gold prices till 2020.
Currently, we are seeing an uptrend given the uncertainty from the corvid crisis.
One of the key factors for the movement is also linked to the debasement of currency which primarily means that most central banks are in the process of increasing the currency to stabilize their economies.
While initially it provides the required support to the system over time as economic activity picks up most prices start readjusting to factor in the easy money in the system. Hence, investors resort to using gold in their portfolios to provide a hedge to the money debasement risks.
4. Mediums to own gold as a financial investment
|
Details
|
Physical Gold
|
ETF
|
SGB
|
Gold Deposit Scheme
|
|---|---|---|---|---|
|
Quality
|
0.999 biscuits
|
0.995
|
0.999
|
0.995
|
|
Source
|
Bullion Dealer
|
-
|
India bullion association price
|
-
|
|
Expense Ratio
|
Storage & Insurance costs
|
0.55% p.a
|
Nil
|
Nil
|
|
Min
|
100 gm/1kg
|
1/10 gm
|
1 gm
|
30 Gm
|
|
Max
|
No limit
|
No limit
|
4KG cumulative purchase in a year
|
No limit
|
|
Tenure
|
-
|
-
|
8 Years with option to exit on 5th 6th and 7th year
|
-
|
|
Interest Rates
|
NA
|
NA
|
2.50% semi annual
|
As below
|
|
Interest Rates
|
NA
|
NA
|
2.50% semi annual
|
As below
|
|---|---|---|---|---|
|
0-1 Year
|
-
|
-
|
-
|
0.50%
|
|
0-1 Year
|
-
|
-
|
-
|
0.55%
|
|
2-3 Year
|
-
|
-
|
-
|
0.60%
|
|
5-7 Years
|
-
|
-
|
-
|
2.25%
|
|
12- 15 Years
|
-
|
-
|
-
|
2.50%
|
|
Premature Withdrawal
|
Sale
|
Market Sale/ Redemption for creation units
|
Market Sale
|
Yes after one year with penalty of lower interest rate
|
|---|---|---|---|---|
|
Withdrawal in Gold
|
NA
|
Yes for creation unit
|
No
|
Yes
|
|
Cap Gains
|
|---|
|
Less than 3 Years
|
Short Term
|
Short Term
|
Short Term
|
NA
|
|---|---|---|---|---|
|
More than 3 Years
|
Long Term
|
Long Term
|
Long Term
|
NA
|
|
Indexation for long term
|
Yes
|
Yes
|
Yes
|
NA
|
|
At Maturity
|
-
|
-
|
Taxfree
|
NA
|
Given that holding physical gold is cumbersome and SGB has a long holding period the ETF becomes the preferred route to hold gold as a financial investment.
Performance of Gold ETF in %
Disclaimer
This publication has been issued by Trufid Wealth Management Private Limited for the information of its customers only.
This publication does not constitute investment advice or an offer to sell, or a solicitation of an offer to purchase or subscribe to any investment.
The information here in is derived from publicly available sources that Trufid considers reliable but which has not been independently verified.
Whilst every care has been taken in compiling the information, Trufid makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of Trufid only and are subject to change without notice.
Opinions expressed herein do not have any regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this publication.
Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed in this publication and should understand that the views regarding future prospects may or may not be realized.
The information contained herein is confidential to the recipients thereof and may not be reproduced or otherwise disseminated.
Trufid or its officers, directors, or employees may have investments in any of the products such in this publication (or in any related products) and from time to time may add or dispose off any investment.
For private circulation only. The information contained herein is confidential to the recipients thereof and may not be reproduced or otherwise disseminated.
