How to Invest in Gold?

Festivals, auspicious occasions or as an investment, gold is a favourite buy in Indian households. Whether you buy it as jewellery, gold coins or gold bonds, it is an investment that never loses its sheen.

In this article, we explore the traditional and the new ways of buying gold.

Gold in India – Brief Overview

We all know, Indians love buying and hoarding gold. Passed on from generations, the coveted yellow metal has become a symbol of wealth, stability and status in our country. This characteristic to accumulate gold is actually a good one for the financial stability of each individual and also the country as a whole. Stock markets can crash; banks can go bust; oil price can tank in a matter of few months, but gold is the last commodity that will get hit in times of great financial crisis. In fact, one of the indicators for economic stability is the amount of gold reserves in a country. India has about 550 tonnes of reserve gold compared to the US which has a whopping 8133 tonnes of the precious metal.

On the contrary India is one of the largest consumers of gold importing almost 1000 tonnes per year! What’s happening here?

We accumulate gold and don’t circulate what we already have. This creates a need for imports that impacts our current account deficit. Imagine the situation where every Indian earns a salary but does not spend the money? The economy will actually collapse as there will be no circulation of currency and hence no growth. Capitalism works on liquidity and gold is not insulated to this phenomena. Indians hoard the gold for years, decades and in some cases centuries (like Temple Gold!)

As an amazing fact the Padmanabhaswamy Temple in Kerala is the wealthiest shrine in the world with estimated wealth of 1.2 trillion USD. This is still conservative and proves ancient India was extremely rich! What’s the use now? Most of the gold we have personally accumulated is not circulated which impacts our import bill and ultimately the country’s economy.

Gold Monetization Scheme

To counter this lack of circulation, the government has introduced the scheme for monetising your existing gold. At the moment most of it sits in lockers, accumulating dust. Through this scheme government wants to pay you interest on the gold you have if you deposit it with a bank much like a bank fixed deposit. Wow? No, there is a significant flip side to this.

The government will actually take your physical metal and issue gold bonds of equal value. So you will mostly lose your physical jewellery but not the actual value because of the issuance of the gold bond. The bond can be redeemed at the prevailing gold price at any time. You will also earn some interest, could be a neat 2% but nothing is confirmed as of now. Again there could be a psychological resistance for most Indian to give away physical gold for bonds (which is a piece of paper, like a share), but the government hopes that this mindset will gradually change.

Doing this, the country can gradually reduce this yellow metal’s imports and still satisfy the demand of gold in the country. The advice is not to convert all your gold to this scheme, but you can consider doing a part of it for that extra income through interest.

Sovereign Gold Bond Scheme

To actually decrease the import of physical gold, the government is now giving an option to buy a bond which is nothing but a piece of paper. So for the ones who would like to buy gold as an investment, they could actually consider buying the bond rather than physical biscuits, coins etc. This will have three benefits:

1. Safer as you don’t need to worry of keeping physical gold at home or in your locker.
2. Easy to redeem
3. You can potentially earn interest on the bond (yet to be confirmed by the government)
4. Good for the country as it will reduce the need to import physical gold.

As a note, the Gold Bond scheme is different from Gold ETF which is much like a mutual fund. While you can earn an interest on a gold bond, the Gold ETF does not earn you any interest. Gold ETF is like a share of a company, you can buy and sell units of the ETF. On a flip side, the bond scheme has a lock-in period. This is yet to be confirmed.

So, the next time you go out to purchase gold for Navratri, Dhanteras, Akshaya Tritiya, Diwali or any other special occasion you can consider buying the bond instead of the actual gold!

As they say all that glitters is not gold, therefore you needn’t be worried about ISO marks anymore!

Final Word: Balance Practicality and Emotion

We Indians are an emotional lot. Sometimes we need to break some emotional barriers and make our lives better. Monetizing a small portion of your gold will help you earn some extra money and also help the country reduce the deficit due to gold imports. Is it time to open up those ancestral lockers?

Arjun Balakrishnan is an investment fanatic who loves writing about investment topics. He regularly writes at Investment Gyaan.