This article was written by Kunal Sampat, Patner at Sampat Jewellers and was published in the India currents October 2015 issue. Read in the magazine here.

DOES

For many of us, purchasing gold coins during Diwali is considered auspicious. The question that frequently comes up is “Does investing in gold makes sense?” To dive into the answer to this question, we will discuss historical gold trends, how is the market price for gold determined, ways to invest in gold and what experts have to say?

Historical Gold Trends

Generally speaking, gold has been regarded a safe haven for many people. In recent years, gold prices have been volatile. In 2013, the gold price dropped more than 25%! We came across this simple, easy to understand chart “Total Real Return Indexes 1802-2013”.

Gold as a investment

 

Looking at the chart above, you can see that if you invested $1 in gold in1802, it’s value would be $3.21 in 2013, a mere 0.6% increase. Stocks, by comparison, would turn your $1 investment from 1802 to $930,550 in 2013.

Does this mean investing in gold is a bad idea? Not necessarily. Given the right economic conditions, gold can turn out to be a great investment! The key having the right mix of investments, gold being one of them.

How is gold priced?

Gold prices are fixed twice daily in US Dollars by the London Bullion Market Association (LBMA).

There are ten price participants who have been accredited to contribute to the LBMA Gold Price. This serves as an indicator and basis for the Market Price, also known as the Spot Price.

When you search “gold price today” in your favorite search engine, what you see if the Spot Price for gold. The Spot Price changes with market conditions. The retail gold price is generally greater than the Spot Price for the following reasons:

Cost to create Gold Coins

When you purchase physical gold coins, gold bars known as bullion are melted and molded into coins. This leads to an additional cost that is passed to the purchaser. Also investors generally purchase 1 oz. gold coins. Smaller sized gold coins are available but

Brand of Gold

The four well-known brands of physical gold are the American Gold Eagle (most expensive), Canadian Maple Gold Leaf, South African Krugerrand and Credit Suisse Gold Bar (least expensive). What you pay for here is the brand and there is no difference in the “quality” of gold. Unbranded gold rounds are also available from private mints and cost less than branded gold coins and bars.

Gold Purity

Karat (symbolized as K) is a measurement for gold purity with 24K being the purest  and most expensive form of 100% gold with no mixed metals. 22K gold has 91.6% pure gold that is mixed with 8.4% of other metals. Similarly, there is 18K (75% purity), 14K (58.5% purity), 10K (41.7% purity) and 6K (25% purity) gold.

Ways to invest in gold

There are many different ways to invest in gold each with it’s pros and cons.

Gold coins, bars and rounds

Branded and unbranded physical gold can serve as a safety net against inflation or should physical currency ever disappear.

Gold Jewelry

You can purchase gold jewelry that will serve as an fashion accessory and also an investment. However there are additional costs associated with making gold jewelry which makes the net price per gram of gold significantly greater than the spot price.

Exchange Traded Funds (ETF)

A Gold Exchange Traded Fund is a marketable security that can be traded like a common stock thereby removing the need to store and secure physical gold.  However there are generally additional fees and commissions associated with ETFs, which may offset any potential upsides in gold prices. You can also purchase stock of gold mining companies. However the rise in gold prices may not necessarily correlate with the increase in stock price of a gold mining company due to other factors such as mismanagement, flooding etc.

What experts think?

When it comes to investing, you may have heard about asset allocation and diversification. What this simply means is that you diversify your investment money across various asset classes such as gold, commodities, stocks and bonds and allocate specific percentages of your money in each of these asset classes.

Tony Robbins, a motivational coach and personal finance instructor recently Ray Dalio from Bidgewater Associates, one of the world’s largest investment management fund. In his book, Money – Master the Game, Tony discusses Ray Dalio’s all-season portfolio. Ray’s portfolio consisted of 30% stocks, 40% long term US bonds, 15% intermediate bonds, 7.5% commodities and 7.5% gold.

The key here is to remember to regularly re-balance your portfolio when are are significant increases and decreases in a given asset class. It is also important to note that gold prices are very volatile and it is hard to predict the right time to buy and sell gold. Whether gold is the right investment choice for your portfolio depends on your tolerance for risk and investment goals.

Happy Investing !

Notes

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
  • Diversification does not ensure a profit or protect against a loss.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Past performance is no guarantee of future returns.

 

1 Thought on "Does investing in gold makes sense?"

  1. Ratul
    January 16, 2016

    Thanks for the awesome post! Investing in gold is obviously a great decision. There many ways that you can use to invest your money in gold. But before that you must confirm which is the most appropriate way for you. By the way, we also published a report on Investing In Gold . You can also heck it out.

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