What is the Better Way to Buy Gold – I prefer physical gold myself but own ETF. If you really know what you are doing, you can buy gold mining stocks. The problem is there are hundreds of gold mining stocks in the world, you got to get the right one.
There was a famous American author who once said: A gold mine is a hole in the ground with a liar standing at the top. There are hundreds of gold mines. But if you know the right one, if you know a company that is going to find gold in Mumbai, you should buy all you can.
But if you do not know that and if you are good in futures, then trading is a wonderful leverage, you can buy gold futures or silver futures. You get wiped out in two hours if you do not know what you are doing but that is a great way to participate.
Many Indians, especially Indian wives have lots of gold, she loves to get gold and I do too. Physical gold is certainly good. I have a lot of gold coins probably because if there is a crisis, you cannot go down to the shop and take a gold bar.
First of all, the guy would do not know if it is real, second if it is, he cannot make a change. You cannot buy a loaf of bread with a gold bar. More likely they will know they are real or silver coins. So, I own a lot of gold and silver coins too but I own ETFs. I do not own any mines at the moment and I do not own any futures at the moment.
What do you make of the rally in gold prices?
Gold prices rallied when stocks were rising due to the ample liquidity in the financial system and when investors were willing to take risk. Typically, in such times, gold has been bought as an inflation hedge. It has shown negative correlation (does not move in the same direction) with equity when investors were not keen to take risks (risk-off mode); for example, during the Asian currency crisis in 1996-97, global financial crisis in 2008 or even the Eurozone crisis in 2011. In crisis times, the investment demand for gold goes up. A combination of these two factors has ensured that gold has done well in the past. In the long term, gold has delivered around 8 per cent returns in dollar terms. If you see the rupee return, it is around 11 to 12 per cent.
However, investors must understand that these returns are also accompanied by high price volatility.
How much gold should be held in a portfolio?
As gold does not generate yields, sovereign gold bonds (SGB) offering 2.5 per cent interest are an attractive avenue to invest in gold. There is no tax on capital gains if held till maturity. There is indexation benefit on capital gains, if sold after holding for three years. We recommend investing up to 5 per cent of your money in gold in a combination of SGB (3 per cent) and gold exchange traded funds (2 per cent). The SGB should be held till maturity.
From a tactical perspective, you should be increasing allocation to gold by two percentage points more. This should be achieved using gold ETFs. Overall exposure to gold should be around 7 per cent of your portfolio.