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Hello everyone…

Wish you a very happy Akshaya Tritiya 2020.

When I was in school I used to watch the Olympics with my eyes glued on our favorite “ONIDA” TV with one question in mind… Who will win the GOLD? On all auspicious occasions like a wedding in the family, Diwali, Akshaya Tritiya the family members used to talk about gold. If I were an athlete, I am absolutely sure that my coach and my near and dear ones would definitely say to me “Is baar Gold jitna hai”… Prepare yourself for gold. No one talked about silver or any other metal. At that time I was not even aware that gold is also an asset class. Winning gold medal in any field gives no less feeling than reaching the peak of Mt. Everest or winning a World Cup. Isn’t it? One thing that became clear to me at that time was that if anything was Gold Standard it would mean it is No.1.

So what makes gold so special…?

Our ancestors were faced with coming up with a method of exchange that was easier to implement than a barter system. One such medium of exchange is a coin. Of all the metals, gold is the logical choice. Gold is an asset with various intrinsic qualities that make it unique. In the investment world, gold is bought for the following 3 reasons:

1. A hedge
2. A safe haven
3. A direct investment

It is a hedge against inflation or deflation because its price tends to rise during high inflation or deflation. When fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to rise along with everything else.

It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise. During times of financial/geopolitical uncertainty it outperforms other investments. Hence it is a safe haven.

It can be purchased as an investment to gain profit once the price rises over time. However, equities tend to give better returns than gold over the long term.

Best way to invest in gold is….

Traditionally gold is held in the physical form either as jewellery or coin or gold bar. But there is another convenient way to invest in this asset class – Gold ETF (Exchange Traded Fund).

Gold Exchange Traded Funds (ETFs) are simple investment products that combine the flexibility of stock investment and the simplicity of gold investments. It aims to track the domestic physical gold price. ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity.

It is advantageous to have gold in electronic form as ETF has many benefits. It is listed and traded on a stock exchange and units of the fund are held in Demat form. Income earned from these is treated as long term capital gain so it is tax efficient. The purity of gold is guaranteed. It is transparent and tracks real-time gold prices.

This brings us to the question… How much gold should one ideally hold as part of his investment portfolio? It is a hedge against a financial crisis and an “insurance” for the portfolio so it should be at least 15 – 20% of the total portfolio.

Where is the gold price headed? At the time of writing this article it is INR 4462 / gram and in US dollar terms – USD 1729 / ounce or USD 55.59 / gram. It is up 43% over Akshaya Tritiya in 2019 in Rupee terms. In US dollar terms it is up 14% year to date and 34% over the last 12 months.

It is very likely that the price of gold will again rise from this point. 2 reasons for it… First, we are already facing economic slowdown and heading towards financial crisis due to a likely increase in NPA of financial institutions. In this situation, the FIIs are likely to divert money towards safe-haven investment. Secondly, it was recently in news headlines that the Germans have sent a US$130 billion bill to China for the chaos they have caused due to Coronavirus. What if this is true and what if other countries follow the same and start presenting a bill of damages to China? If this happens there is a good chance that the Chinese will shift their paper assets to more and more holdings of gold. What will this do to the price of gold is anybody’s guess out there.

So Catch the Gold now…

Happy Investing!

Warm regards,

Mayank Talwar