Key questions before investing in gold

  • 05 Jun 2024
  • Read 6 mins read

Some golden questions for you

Did you know that Indian households have the largest hoard of gold at 22,000 tonnes? Valued in current prices, that is close to $1.6 trillion. Each year on Akshaya Tritiya or on Dhanteras, you find people queueing up to buy gold. In addition, gold is also a preferred product to be brought in digital form as we have seen in the case of gold ETFs and sovereign gold bonds (SGB). Let us address some very fundamental questions before investing money in gold. Remember, that for a long time, gold has not only been a shining asset but also a safe store of value in tough times. Here are some key questions to ask.


Is gold fitting into my financial plan?

The yellow metal is not just about its perpetual allure but also about how it fits into your overall financial plan. Normally, financial advisors recommend allocating 10-15% of your overall portfolio mix to gold. Here we talk about gold as an investment and not the gold you consume as jewellery. Remember that gold is meant to be a hedge against uncertainty and also to an extent against inflation. Gold is rarely an asset that creates value over time. Hence you need to tweak your exposure to gold accordingly. The secret is to keep your gold exposure in the portfolio between 10% and 15% overall.

Is gold the best fit in current macroeconomic scenario

This is an interesting aspect to consider before buying gold. Normally, gold as an asset class performs best when there is global uncertainty. Remember that the best performance by gold was seen in the 1970s and post Lehman in 2008. That was the period when global uncertainty was at its peak. How does this gel with the previous point on percentage allocation to gold? You still must maintain a portfolio allocation of 10-15% to gold. But, when the level of economic uncertainty or geopolitical strife is higher, move it closer to the upper end of the range at 15%, and at other times let it gravitate towards 10%.

Physical gold, sovereign gold bonds or Gold ETFs

It is basically a question of whether you should hold gold in physical or digital form. One thing is clear now barring jewellery, any gold holding as a portfolio hedge must ideally be in digital form. There are a variety of options to hold gold. Sovereign gold bonds offer several advantages like doing away with storage, insurance, and conversion costs; as well as the benefit of an additional assured 2.5% per annum. How do gold ETFs score? While gold bonds are free of capital gains if held for 8 years, these gold bonds are not available on tap. Here gold ETFs do a better job. Gold ETFs also have a low-cost structure to make them a good passive investment. Above all, gold ETFs are liquid in the secondary markets.

How pure is the gold I am buying?

Gold purity is relevant when you buy physical gold and also when you buy digital gold. For instance, the gold used in jewellery is normally 22-carat gold, since that is the gold that is harder than 24-carat gold. Normally, when it comes to gold bars and digital gold, the benchmark is normally 24-carat gold and that has the highest price due to the purity. Therefore, when you buy physical gold in bars or coins always opt for the highest level of 999 purity and insist on 24-carat gold. This loses the least value due to its low non-gold content. Digital gold is structured for high-purity units and that is a major positive in digital gold. Gold ETFs and gold bonds are backed by 24-carat physical gold.

Ability to get a loan against gold holdings

Like other assets, it is possible to hypothecate gold and get a loan against this gold. If you are looking at a loan against gold, then physical gold works best. It is possible to walk into any bank with your physical gold and get a loan sanctioned and disbursed in less than an hour. There is only basic documentation that is required in such cases. Loans against gold bonds are not possible during the lock-in period and not too many banks will fund against gold ETFs. This is an important consideration when you finally take the decision of physical gold versus digital gold.