Advantages and Disadvantages of investing in Gold

by March 22, 2017
Advantages of investing in Gold

Gold has been a traditional store of value. Over centuries, people and nations have treasured Gold as a safe store of wealth. Reserves of Gold possessed by countries is often considered as a symbol of the nation’s riches.

Gold is considered as a “safe haven” investment. It means that whenever the financial market or economies go through a downturn or a recession, people normally switch over to investing in Gold as a safe store of money. There are many forms in which Gold is bought. It can be bought in physical form as Jewellery or simply as Gold coins or Gold bars. It can also be brought electronically as Gold Futures and Options or Gold ETFs. (Exchange Traded Funds).

Like any other financial instrument, investment in Gold comes with its set of advantages and disadvantages. The advantages are as below:

Portfolio Diversification: Due to the propensity of investors to invest a larger pie into equity and related financial market instruments, Gold works as an ideal avenue for diversification. When markets move south during a recession or financial market turmoil, Gold prices are often seen to rise.

diversification

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Universal Appeal: Gold has a market everywhere in the world. It is an asset that the world markets track and the global markets have a great mechanism of discovering the price of Gold every day. Hence, it can be easily liquidated and converted to liquid cash in any part of the world.

universal

Inflation Factor: If you invest in “Fixed Deposit” with a 10% assured annual return and if the inflation stands at 8%, you effectively get only 2% return on your investment. In case of Gold however, its value rises and does factor inflation better than cash/ fixed deposits etc.

inflation

However, there are a few disadvantages of Gold investments as below:

Instant Returns on investment: The investment in Gold does not yield interest income nor does it earn periodic returns. Only when the value of Gold rises and you sell it would you make money. Hence, it would not yield you any instant return on investment, unless its value sees a sharp rise after you buy and then you decide to sell it instantly.

Returnoninvestment

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Physical Storage and Security: If you have physical Gold in possession, safeguarding it would mean opening a locker in a bank. This would lead to additional spending from your end. Also, when Gold is bought, you have to pay for the “making charges”. When the same Gold is sold, you get liquid cash to the extent of the weight of the Gold and the corresponding rate in the market. You do not get back the money you paid towards “making charges”.

locker

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Carrying Physical Gold, returns and taxes:

When you move from one country to another, carrying physical Gold is often a cumbersome task with tightened security and multiple checks at airports. Furthermore, when the value of Gold rises, dollar is seen to get devalued. Thus, it may not fetch the desired return when it is sold in an international market in dollar terms. In India, capital gains tax rates on Gold investments are higher than other financial instruments.

So, when you ask whether one should invest in Gold or not, there is no correct answer. It depends on whether you want to invest long term, your investment goals, your expectation on returns and the purpose of the investment.

While I have listed the avenues to invest in Gold, the advantages and the disadvantages, I would recommend the readers to take a very informed call before investing in Gold. If your investment goal and purpose supersede the disadvantages and veer clearly towards the advantages, then Gold is a good, and more importantly, safe store of value.





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