Test by fire before investing in physical gold

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Ever wondered why gold has been appealing to generations for thousands of years? Well, this shiny metal has been tested by fire and proved to be the man’s trusted companion in times of crisis. Many investors believe that the yellow metal is an asset with various intrinsic merits that make it unique and necessary for them to hold in their portfolios. In comparison with paper-dominated currencies, gold has successfully preserved wealth for generations. Let’s understand this with an example:

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Suppose in the 1960s, one gram of gold equaled Rs 112 and you had a choice to preserve 1 gram of gold or Rs 112 currency. In that era, both would have been sufficient to buy you a pair of shoes. However, in today’s time, Rs 112 would be too less an amount to buy a pair of shoes and on the contrary, the value of 1 gram of gold can still buy you a decent pair. You would have lost a substantial amount of your wealth if you had decided to hold the Rs 112 currency as opposed to the one gram of gold because the value of gold has increased today, while the value of the currency has been eroded by inflation.

Investment in physical gold

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An investor can invest in gold bullions, gold coins, or gold jewellery.

Bullion is the general name for pure gold or silver which are transformed into bars or minted into coins for investment purposes. They come in various sizes and are stamped with purity, origin, and weight. They offer a minimum guarantee of 99.5% of purity. Gold bullion bars can be bought from banks and gold dealers. It is also advisable to be updated about the price of gold when buying gold bullion to buy at the right time since most dealers update their prices based on current spot prices.

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Gold coins offer the investors the option to buy the purest form of gold in the minimum weight of 0.5 grams with low making charges in comparison with jewellery. Several governments mint gold coins for investors. To get better deals on gold coins it is advisable to buy them from reputable, licensed dealers over local collectors or pawn shops.

Gold Jewelry is also a preferable option among small Indian investors. Jewellery or ornaments are often passed on to generations in Indian families, hence are preserved for longer durations. However, investing in gold jewelry comes with its risks than investing in pure gold. Gold purity in jewellery is measured in karats, with 24 karats being 100% pure.

Taxation on physical gold

No Tax Deducted at Source (TDS) is levied while selling physical gold. In India, cash purchase of jewellery, bullion, and precious gems and stones of value more than Rs 2 lakh is not allowed without KYC. Furthermore, while buying gold jewellery, a 3% Goods and Service Tax (GST) on the value of the gold plus any making costs are charged.

Benefits and limitations of investing in physical gold

Benefits

  1. 1. Hedge against inflation risks —Inflation can kill investment in the long run as the money loses its value over the years. Gold and other safe assets protect cautious investors from inflation. Investments in gold have outperformed inflation rates
  2. 2. Protection during economic slowdowns – History has witnessed many occurrences from the Great Depression to the Covid pandemic when gold has proven to be a savior. When the equity markets fall, gold performs well
  3. 3. The Best way to save money – Buying gold coins or bars can ensure good savings in the long run. Gold coins and bars come with quality assurance.
  4. 4. Less maintenance as compared to real estate – investing in physical gold requires less maintenance than investment in real estate. You can keep the gold in the locker for many years irrespective of weather conditions.

Limitations

1.Multiple expenses: An investor investing in physical gold is needed to bear multiple expenses like storage costs to prevent theft, insurance for bulk gold, and making charges in case of jewellery or ornaments.

2. Time-consuming trade: Selling physical gold cannot happen with a click of a mouse or a call to a broker. It may require delivery to the dealer which may take days or weeks

3. No interests or dividends: A physical gold doesn’t provide interests or dividends. 

4. Driven by global factors: Indian gold prices are subject to changes in the international markets. A stronger dollar may affect gold prices.

Moneycontrol journalists were not involved in the creation of the article.

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