Gold merits a seat in larger investment portfolio


NEW DELHI: Down the ages, people have hoarded gold as a proven stock of value even in uncertain times. In civilizations like India and China that have witnessed invasions, disastrous natural calamities and at times mass migrations, gold has become the ultimate investment portfolio.

No wonder, every family and every place of worship in these two Asian giants have hoarded gold. Two years ago, the Tirumala Tirupati Devasthanams at Tirupathi, which manages one of the world’s richest temples, deposited 2,780 kg of gold with the State Bank of India under the Long-Term Gold Deposit Scheme and still remained the repository of one of the world’s largest caches of bullion.

However. the question which has plagued investment advisors has been: does gold earn an investor good returns?  Opinions have been divided. Those who support investment in bullion point out to its long-term returns, while those who consider it as a last Millennium’s idea, decry inadequate medium-and-short-term returns, and point out that even in the long run, its not the best possible option. Equities, real estate and even commodities have more often than not outperformed gold.

Over a 20-year cycle, gold has increased in value by over 6.5 times. The average price of gold in 1999 in India was about Rs 4,234 for 10 grams of gold. As on April 20, the price of 10 grams of the yellow metal stands at Rs 31,950; and Rs 33,000 depending on the city the gold is bought.

The BSE  Sensex in the same period has, however, gone up 10 times. As Amit Bannerjee, an independent merchant banker specialising in East Asian Funds, says, “An average investor does not know when to enter the stock market or when to sell, or for that matter, which stocks to pick. His return may be way, way below the 8.1 times we are talking about. In that sense, gold is a steadier investment.”

The World Gold Council says that since the turn of the century, demand for gold has grown worldwide on an average by 15 per cent every year. This has been driven in part by the launch of new easier ways of buying gold, such as gold-backed exchange-traded funds (ETFs), where buyers do not have to keep gold at home, but can simply buy a paper that represents their gold purchase. In part, it has also been spurred by the expansion of the middle-class in Asia, especially in India and China, and a renewed focus on effective risk management following the 2008-09 Wall Street financial crisis in the US and Europe.

For those who do not like the risks associated with keeping physical gold, Gold ETFs, which can be bought in small units and kept in demat form, are an easier option. These funds offer a tax-friendly regime as money earned from Gold ETFs are subject to long-term capital gains tax, but have no additional burden of sales tax, VAT or wealth tax.

However, like mutual funds, the Net Asset Value of a gold ETF can go up with bullion market trends. Besides, expenses such as fund manager’s fees can impact the rate of return. The verdict on gold versus other investments is still out there in the open, yet undecided. However, as part of a larger portfolio of stocks, gold certainly merits consideration as a fourth pillar in an investor’s portfolio.


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