Is Investing in Gold Still Profitable?

Introduction

Every gold coin has two sides: buying gold can be profitable, but it can also be a losing proposition. The truth is always somewhere in the middle. Gold’s profitability and inclusion in your investment portfolio depend on various elements, such as your investment objectives, time horizon, and, ultimately, your investment strategy.

To ask whether a specific asset is a good investment or not is normal and even prudent for an investor. This argument makes sense, especially for gold, which is an inert metal, that doesn’t pay interest.

There are many ways through which an investor can invest in gold. Purchasing a physical product, such as gold coins or bricks or even jewellery, Exchange-traded funds (ETFs), and purchasing shares in gold mines and related businesses are some options. You can buy the metal for various reasons, and there are numerous ways to do it.

In recent times, there is also the option to buy gold virtually or invest in sovereign gold bonds issued by the Reserve Bank of India.

The Modern Economy and Gold

Even though gold is no longer used to support the world’s currencies, it still has value in today’s culture. It remains crucial to the world economy. To prove this claim, one only needs to look at the financial statements of central banks and various financial organisations, including the International Monetary Fund. These organisations manage almost one-fifth of all the gold discovered above ground. In addition, several central banks have increased their current gold holdings, which reflects worries about the long-term health of the global economy.

Different Methods of Owning Gold

One of the most significant variations between considering gold investments today and several generations ago is the sheer number of investment possibilities. Today, you can invest in:

• Gold Coins
• Gold Bullion or Jewellery
• Gold Futures
• Gold ETFs
• Gold Companies
• Gold Mutual Funds
• Sovereign Gold Bonds

Reasons To Invest In Gold

• Proven Hedging Against Inflation

Gold has consistently proven to be a powerful inflation hedge. Gold prices are essentially unaffected by inflation, so you won’t lose money when inflation occurs, even if the worth of all currencies declines on the international market.

• Instant Liquidity

One of the main justifications for making any financial investment is to have a backup plan in case you ever need it, and gold is one of the most liquid hard assets. You only need to sell your gold to the buyer of your choice if you find yourself in an emergency.  

• Tangible Resource

Have you ever attempted to make a real estate investment or any other financial investment? If so, you should know that purchasing gold is far simpler than purchasing real estate or other tangible assets. People looking to start investing might feel safe because buying gold carries minimal risk.

• Wealth Generation

Gold has a unique position in Indian households and stands as a symbol of family wealth. For instance, gold jewellery is passed down from one generation to the next as a legacy.

Taxes on Investments in Gold

Let’s quickly discuss the taxes that are payable on gold assets under the Income Tax Act. On investments over Rs. 30 lakhs, a wealth tax of 1% of the entire investment is payable. The capital gains tax rate for physical gold and gold ETF is 20%.

An Unfavourable Period to Invest in Gold?

To determine the value of gold, let’s compare its performance in S&P 500 during the previous year (as of March 2022). The S&P 500 generated total returns of roughly 10.4% compared to gold’s 18.9% during the same period, showing that gold has outperformed the latter over this time frame. Even when compared to Indian indices, such as the Nifty 50 or the Sensex, gold has performed remarkably well.

The time frame that we consider for investment in gold is crucial. Depending on the timescale, longer or shorter, gold or the whole market may outperform, occasionally by a significant margin.

The key takeaway is that gold isn't always a wise investment. The best moment to invest in any asset is when there is a negative graph, and the purchase is not pricey, offering a significant upside potential when it returns to favour.

Takeaway

Every investment comprises both benefits and drawbacks. Purchasing shares in a gold mining firm might be a safer option if you don’t want to hold physical gold. Purchasing coins, bullion, or jewellery might help you achieve financial success if you think gold might be a good investment against inflation. The futures market may be your best option, but remember that leverage-based holdings come with risk. Finally, if your main goal is to use leverage to profit from rising gold prices, this is the route you should choose.

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