Safe haven or shiny trap? Navigating the world of gold investment in India

Exploring digital avenues beyond physical ornaments can unlock gold's true potential as a secure and valuable asset, enriching lives beyond its dazzling shine

“Sona Upbhog Ki Vastu Hai Aur Nivesh Ke Liye Asti Bhi

Haath Lagaane Ke Pehle, Kar Lo Lakshya Ki Nishpatti Bhi.”

Translation: Gold is a consumption commodity as well as an investment asset class

Be sure of your goal and purpose before you go in for invest & amass.

When it comes to Gold, it connotes differently to different people. For a woman like me it brings a delightful feeling. For most of women, in India, it is linked with looking impressive, looking gorgeous and so on ans so forth. For menfolk, it may be hard on their pockets, especially if it happens to be birthday or anniversary. For Indian Government, it’s a commodity which is required to be monetized to reduce the import bill.

True! Gold as a consumption goods is of immense value in terms of psychological satisfaction and emotional appeal. This is particularly so in India, thereby making India the largest importer of Gold in the world.

The gold standard of monetary system, where a country’s currency or fiat money used to be linked to gold, gave gold its universal acceptability. Though most of the countries have abandoned this practice, but gold never lost its glittering.

Gold serves a dual purpose in our lives – it's not only a symbol of personal adornment but also a sought-after investment asset class.

Firstly, gold's aesthetic appeal and rarity have made it a prized possession for centuries. It's crafted into exquisite jewellery, cherished heirlooms, and ornamental pieces that carry sentimental value. Beyond its material worth, gold holds cultural and religious significance, often used in ceremonies to symbolize purity and prosperity.

Secondly, gold's stability and historical value appreciation have made it a favoured investment avenue. It underscores its potential as a store of value during economic uncertainties. However, it's crucial to define objectives before delving into gold investment. It also emphasizes the need for a clear investment strategy based on individual goals and risk tolerance.

Let’s try to understand, Gold as a consumption commodity and as an investment asset class.

Gold, in India, constitutes major portion of marriage expenses. This can be out of compulsion or out of parental love. No marriage is complete without gold ornaments. Gold ornaments are a requisite for all the participants in the marriage in addition to those for bride and groom. It’s so important as an aggrandisement that people who do not have genuine gold jewellery, go for fake one for dressing-up. Besides the reason stated above, gold has a limited industrial use making it of little value in true economic sense. Gold ornaments have immense emotional value. A tag that ‘this Necklace or this Bangle has been given to me by my mother-in-law when I came as a bride in this house, and I hand it over to you today’ has such an emotional value that no money can buy. Emotion is good but it should not lead us to irrationality. There are people who keep a large quantity of Gold with no practical use, they are advised to monetise it that would help them grow their asset.

Gold is considered, and empirically so, as an excellent hedge against inflation. Besides, Gold is proven diversifier of investment portfolio as it is negatively corelated to most of the other asset classes. Globally, it is considered as safe haven in case of any financial crisis.

Investment in Gold can be done in various forms. These include coins, bars, Gold Exchange Traded Funds, Sovereign Gold Bond. In all the referred investment modes, the underlying is gold only, and returns of all of them depend on gold price movement. Each of investments has different risk & return profile and an investor must be aware before going in for investment.

Physical gold is the most popular kind of gold investment in India. People tend to buy gold much more than their consumption needs. The riskiest part in case of buying physical gold is its purity. One must pay heed to age-old adage that ‘everything that glitters is not gold’. Most of time one finds that purity is always more while buying than selling. Purchasing from a trusted brand or verifying hallmark sign can minimise this risk to some extent.

Beyond the consumption requirements, be it for personal jewellery or jewellery for kids to be gifted at the time of marriage, investment in gold should be in digital form. If liquidity is not an issue, Sovereign Gold Bond, in my views, is best investment in gold as it will earn 2.5 per cent annual interest together with tax free capital gain on maturity.

(The writer is Senior Vice President, SBI Funds Management Limited)

(Translation & Synopsis by Manjula Salian, Asstt. Vice President, SBI Funds Management Limited)