Investing in gold has been regarded as an auspicious tradition within Indian culture for years. Nevertheless, buying gold jewelry and physical gold carries a significant markup.
A 3% GST paid at the time of purchase, and additional fees on making, designing, and storing gold, tend to diminish its real value. Yet, our country ranks amongst the world’s biggest consumers of gold, with Indian households owning more than 11% of the world’s total gold.
Gold has long been regarded as one of the most valuable assets. However, as the Indian economy evolves, investors find themselves asking, “should we invest in gold?”
This article will help you answer this question.
Let us begin by looking at the benefits of investing in gold.
Advantages Of Investing In Gold
Gold has long been regarded as the “gold standard” of asset classes. Here are some reasons behind this belief:
- Gold offers a superb hedge against inflation. In the case of many investment instruments, the interest rate is exceeded by inflation. This has historically not been the case for gold. It has consistently been outperforming inflation in our country.
- Gold is also a great diversification asset. If you have invested in stocks or mutual funds, gold can be an excellent option to include a different asset in your portfolio.
- One of the biggest advantages of investing in gold is the high liquidity benefit associated with it. Regardless of what form you purchase your gold in, selling it when the need arises is often easy and quick.
Now, let’s look at the challenges associated with investing in gold.
The Buying and Selling Price Disparity
Every tradable commodity, including gold, has a buy-sell spread. That is, there is a price difference between buying and selling. This spread varies according to a plethora of variables such as external economic conditions, supply, demand, volatility, and so on.
This is why there is an approximately 8-10% difference in the price levels of buying and selling gold coins. This difference could increase for gold jewelry, depending on the making charges.
Risks of Storing
Gold has ceased to provide decent returns to investors in recent times and may have even provided poor returns.
In just about any form, physical gold is a valuable commodity. Given the risk of theft, storing it demands a proper space, perhaps with a locker within a house or in a bank, and this comes at a price.
Furthermore, whenever you require the gold, you must physically go and obtain it. It will not ‘find’ you like other financial goods.
Gold investments are yet to establish themselves as efficient tax-benefit tools. Digital gold is treated just like physical gold when it comes to taxes on capital gains. Digital gold is by far the most recent investment framework that has gained traction.
Rates of return on digital gold assets owned for less than 36 months aren’t really subject to strict taxation. Long-term capital gains are subject to a 20% tax on the total value. Additionally, a service charge and a 4% cess with indexation perks are also applicable.
The Premium of Purchase
Have you ever observed how two gold coins with the same quantity of gold can be marketed at varying costs? This is clarified by the premium, which is an essential consideration when making investments in gold.
A gold coin premium is merely the difference between the cost of the coin and the worth of the metal it contains.
The coin’s value is thus the amount added over the value of gold.
Based on the financial situation and economic conditions, the amount of gold in the market compared to the demand for the gold coin in a discussion can significantly affect the room premium. An odd request for a gold coin, in particular, can cause the gold coin’s premium to skyrocket as compared to other existing gold coins.
Gold is regarded as a secure investment. Because the price of gold does not typically progress in conjunction with market rates, it is intended to act as a safety net when markets are in decline.
As history has shown, the price of gold doesn’t often arise, especially when markets are flying high. When the market is fearful and stock prices are expected to fall, investors generally turn to gold.
If you want to profit from the rise in gold prices, you can invest in gold via methods such as sovereign gold bonds (SGBs), which pay interest in addition to the gold price.
The Volatility of Prices
Gold is a store of wealth that’s always been useful in times of financial strain. Gold prices, like other commodity prices, are affected by a variety of external factors, such as interest rates, rate of inflation, monetary indexes, and, most notably, geopolitical scenarios.
When it comes to the current state of global markets, gold rates are extremely volatile, with the two most important reasons being massive inflation and geopolitical conflicts.
While the benefits were not spectacular in certain years, there were spectacular improvements during Covid, and this year as well, amidst the ongoing rift between Ukraine and Russia, the price of gold has risen to as large as $2050 per ounce.
Alternative Options for Investments
An alternative investment is a type of investment that is distinct from traditional investments.
Asset classes other than stocks, bonds, and cash are generally referred to as alternative investments. These investments differ from conventional investments in that they are usually not easy to sell or turn into cash. Alternative investments are also typically called alternative assets.
In the next section, we will shed some light on one of the most popular alternative investment opportunities currently available to Indian investors.
Peep-to-peer lending, as the name suggests, is an investment opportunity that works by facilitating loans between two parties. As an investor, you become a lender and offer a loan to a borrower and earn interest on your investment.
Being an RBI-regulated space in India and NBFC-P2P, LenDenClub facilitates the connection between creditworthy borrowers and lenders. To safeguard lenders from default risk, LenDenClub only allows highly creditworthy borrowers to access the platform. Each borrower on the platform has been evaluated using over 200+ data points. This is why LenDenClub has been able to maintain a default rate of under 4% over the years.
It is a lucrative investment opportunity as investors on LenDenClub have the opportunity to consistently earn annual returns of 10-12% p.a.
Clearly, investing in gold isn’t as simple a decision as it is perceived to be. In fact, with all the considerations in mind, many investors find themselves turning away from gold, and for a good reason. In today’s volatile economy, investors must find opportunities that allow them to hedge against market volatility. P2P investments are a great way to earn consistent and high returns without having to deal with volatility-related risks.