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Gold Investment: Is It Good to Add Gold in Your Portfolio - ICICI Direct

12 Mins 19 Jan 2024 0 COMMENT

In today's world of complex financial products and uncertain market conditions, knowing where to invest your money can be hard. That's why it's essential to have a stable and diversified investment portfolio. Have you considered investing in gold? Gold is known for its historical resilience and ability to maintain its value during economic turbulence. Plus, as gold has a low correlation to equity markets, it can be an excellent tool for diversification, which helps you in reducing portfolio volatility. Moreover, gold has historically performed well during rate-cut cycles and has been a trusted store of value. So, if you're looking to navigate different market environments, gold could be an excellent choice for you. Let’s discover more about gold in this article.

The Glittering Hedge

Imagine you're in a medieval kingdom, and the dragon of economic uncertainty is wreaking havoc. What armor would you choose to protect your wealth? Well, in the financial realm, gold often plays the role of a sturdy shield—a hedge against inflation and economic downturns. When other assets falter, gold tends to shine its brightest, providing stability and resilience.

Just like a knight wouldn't face a dragon without armor, an investor might find solace in gold during turbulent economic times. It's a timeless hedge that has weathered countless storms throughout history.

Correlation Chronicle with Equity Market

Now, let's venture into the forest, where every financial instrument dances to its unique tunes. Gold, known for its independence, often moves to a different beat compared to the equity market. While stocks may be doing the cha-cha, gold might be gracefully waltzing, providing diversification and stability to your portfolio.

A diversified financial portfolio is like having a variety of instruments in an orchestra. When one falters, the others pick up the melody. So, the question arises: Does gold's unique dance make it a worthy addition to your financial portfolio? Let's understand this with some exciting statistics, where we measure the performance of gold vs. Nifty. We have taken the data from 2005 onwards, when Nifty fell by more than 8% in a month, and compared the performance of Nifty and Gold in that month.

Month

Nifty Change%

Gold Price Change %

Oct—08

-26.41%

-11.01%

Mar—20

-23.25%

3.50%

Jun—08

-17.03%

4.74%

Jan—08

-16.31%

11.06%

May—06

-13.68%

1.52%

Jan—11

-10.25%

-3.04%

Sep—08

-10.06%

10.76%

Mar—08

-9.36%

-4.02%

Nov—11

-9.28%

7.13%

Oct—05

-8.86%

3.49%

Aug—11

-8.77%

16.84%

Feb—07

-8.26%

3.93%

*Source: investing.com, gold returns are of MCX Gold Mini Future

As we can see, in most cases, the gold price behaves opposite to the Nifty. It indicates a low or negative correlation of gold with the equity market and gold can be used as an effective diversification addition to the portfolio.

Fed's Wand and Gold's Price

In the magical realm of the United States, the Federal Reserve holds a wand that can cast spells on interest rates, affecting the entire financial landscape of the world. But how does this magic impact the price of gold?

When the Fed makes policy decisions, it sends ripples across markets. Gold, being a globally revered asset, can experience fluctuations in response to these spells. A hawkish Fed commentary (expected rise in the interest rate) might cast a shadow on gold prices, while a more dovish approach (anticipated fall in the interest rate) could make them soar. It's how a monetary policy can influence the fate of precious metal prices.

Historical Tapestry

Throughout the ages, gold has maintained its allure, often serving as a store of value and a symbol of wealth. Whether it was the gold rush of the 19th century or the modern era of financial sophistication, gold has stood the test of time.

By studying the historical performance of gold, you can glean insights into its resilience and ability to adapt to changing economic landscapes. These tales from the past serve as a guide for those who are still determining the return that gold may offer.

Period

Annual Returns

Last 10-year return (Dec 13 - Nov 23)

7.8%

Last 5-year return  (Dec 18 - Nov 23)

14.7%

Last 3-year return  (Dec 20 - Nov 23)

7.7%

Last 1-year return (Dec 22 - Nov 23)

14.3%

*Source: investing.com, gold returns are of MCX Gold Mini Future

How to Invest in Gold

Let’s now go through different types of gold investments, namely, physical gold, Gold ETFs, Sovereign gold bonds, and gold futures listed on the commodity exchange.

Physical Gold

Physical gold is a good investment option for conventional investors as it doesn't require paperwork or a demat account. However, market fluctuations affect gold prices, and there's a risk of purity and theft when storing gold.

Gold ETFs

Gold ETFs(Exchange Traded Funds) are a substitute for physical gold, allowing investors to stay invested in gold without owning it. To invest, one needs a Demat account and may incur nominal charges. Any market price fluctuations in gold will directly impact the gold ETF's price. This product best suits investors seeking convenience without purity or storage concerns.

Sovereign Gold Bonds (SGB)

SGBs are government-backed securities denominated in grams of gold and issued by the RBI on behalf of the Indian government. They offer a superior investment option to physical gold as the risks and costs associated with storing gold are eliminated. The investor is protected for the quantity of gold paid and receives the ongoing market price at the time of redemption, along with an annual interest of 2.5%. SGBs have a maturity of 8 years and allow premature withdrawal after 5 years.

Gold Futures

Gold futures can be a good short-term investment option for diversifying into gold in India. In India, gold futures are traded on various exchanges like MCX, NSE, etc. It involves a contract to exchange gold at a predetermined date and price. Futures contracts offer leverage, increasing the risk and also the potential for higher returns.

Taxation on Gold Investment 

Let’s now discuss the tax liabilities associated with investing in gold.

Gold investments are taxed differently depending on the investment vehicle chosen. The physical gold purchase has a 3% GST charge and making charges. Income from selling gold is taxed as capital gains. Holding gold for under 3 years is a short-term capital gain and is taxed according to the investor's tax slab. Holding for over 3 years is long-term capital gains and taxed at 20%, along with any surcharge and cess.

Similar is the case with the income arising out of the sale of the units of gold ETFs with short-term capital gains being taxed according to the tax slab and long-term capital gains being taxed at 20% along with indexation benefits. However, investments made on or after 1 Apr 2023 in gold funds will be taxed as per your income tax slab, irrespective of the holding period.

SGB investors earn interest classified as income from other sources. If the SGB is sold after one year, gains are taxed at either 20% with indexation benefits or 10% without indexation. However, if the SGB is held for up to 12 months, it is taxed at the slab rates applicable to the taxpayer. Returns after 8 years are tax-exempt.

Conclusion

In the world of investments, gold emerges as a versatile character, donning various roles – from a hedge against uncertainty to a performer in times of market distress. Its low correlation with equities, resilience during Nifty downturns, sensitivity to Fed spells, and a rich historical tapestry make gold a compelling addition to any well-balanced portfolio.

Gold is not just a shiny metal but a timeless companion in the ever-evolving saga of investments. So, whether you're a seasoned investor of stocks or a novice navigating the financial maze, consider adding a touch of gold to your portfolio – it might just be the golden key to unlocking a magical financial future.