India is obsessed with Gold. Yes, we are not just talking about our pride, the Tokyo 2020 Olympic Gold medal Neeraj Chopra claimed with his absolutely stunning javelin throw or gold medals of Avani Lekhara and Sumit Antil at the 2021 Tokyo Paralympic Games. We are talking about the Indian obsession with the yellow metal.
For an average Indian household, Gold is not just an asset. From when a child is born, through the entire life, Gold plays an important role as a gift and is seen as part of the heirloom. Women adorning exquisite jewellery are a common sight in Indian weddings. So what makes Gold such an important part of our lives.
For time immemorial, gold has been used for trading, and that liquidity has led us to believe that Gold is a wonderful asset, which can be sold and converted into money whenever we want. Gold has also been seen as a asset whose value is inversely proportional the equity shares. While equity shares are looked up as “high-risk high-return”, gold has the perception of a “low-risk – high-return”. Even if you ask your grandmother, she will tell you that gold prices have sky-rocketed since her wedding.
When you look at Gold from an investment angle, it acts as a perfect asset diversifier. As mentioned earlier, due to its inverse relationship with equity market, it can be used as a hedge to the equity portfolio. Gold is famous for panic buying, especially when there is bloodshed in the stock market, prices hitting the roof, and falling sharply when the markets recover.
2020 has been a year of panic, year of the pandemic. Equity crashed, and so did the gold when equity recovered. 1 Year return on gold investment was in a 6% negative. But, when you look at medium term and long term, the returns have been decent. a 5 year return of 15%, 10 years of 8% and 15 years of 12%. When we look at this, the model isn’t predictable. The variables which impact the returns are just too many, and you can also add sentiment and emotion to it.
But with all this said, gold is bought as a jewel, and household are quite sentimental about their gold. They are used more as an ornament than as an asset which can be liquidated. Even gold coins and gold bars are usually converted into jewellery, and not liquidated.
So how do we use Gold as an asset? The best way is through RBI Sovereign Gold Bonds. Gold bonds which are issued by the Reserve Bank of India, with a 5-year buyback option. Liquidity that way is ensured, as it is backed by the promise of the Government. The returns are similar to that of physical gold, just that you hold it in your Demat Account or as paper. An incentive of 2.5% over and above the price of gold is provided by RBI for holding SGB. The reduction in the purchase of physical gold reduces the nation’s import of gold and helps the exchequer catch some breath. SGB is almost a liquid asset, as it can be sold in stock exchanges. And there is also No Capital Gain Tax, if the RBI Sovereign Gold Bond is held till its maturity period.
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What do you think about this article? Do you think Gold can be a good asset to retain or is it just sparkling jewellery? Let us discuss. Do leave your comments here or on Youtube.
If you are looking at investing in RBI Sovereign Gold Bond, you can contact us at 94440 55430 or write to us at saravanan@purplepond.in.
