Two things are happening now. We have seen the worst through the pandemic in our economic cycle. Covid19 has slicing a huge part of the GDP of global economies shaving it down to about 5-10% globally. Now we have seen the worst so it is only going to rise from here. Things are going to get better.
Today especially in India you cannot find a house that has not invested on gold. In RBI 6% of Reserves are gold and Indian households have 40 times more gold than the RBI itself.
Where does gold price come from?
Gold is a global asset and not a domesticated one. Its price again is not based on utilisation. Gol prices are fixed at the London Metal Exchange. The London Metal Exchange is the world centre for industrial metals trading. The prices discovered on our their trading platforms are used as the global reference price. So therefore gold price increases or drops globally depending on LME.
What causes gold prices to increase and decrease?
October 2008 is an important date in gold history. It was when global recession began and it was when gold prices were highest. Post that from 2011 to 2019 (8.5 years) gold prices remained flat it also dropped.
What can we understand from this? Gold is an asset for troubled times. When the world economy is suffering that is the time when gold price will increase. When the economy is being hit global GDP will drop, interest rates will drop, and liquidity in the economy will increase when these three things happen prices of gold will increase. This is what happened even during the pandemic
When is a good time to invest on gold?
It’s all about being able to forecast what is going to happen in the world economy in two-three years from now. Like 2019 would have been a good time to start investing in gold because that was the time China-US trade war was happening. And that would defiantly affect the world economy, interest rates will fall so gold prices will increase. Gold is an asset for tough times. During stabilised period it will not help. So you need to forecast the accordingly before you make your investments.
How much to invest on gold?
Gold will protect you during economically tough times. But that does not mean you should put all your money in gold. When things are going good it will help but that is not a constant. 5% of your financial asset/investments can be invested on gold.
Investment options available:
One of the most direct ways is buying jewellery. But When we buy jewellery we also pay making charges and wastage charges to the jeweller which is not considered when you sell it.
Then there is buying gold bars or coins. Which again is not advisable, because it becomes an idle asset. Plus how safe is it to keep gold bars at home? Taxation is also high when you sell it in the future.
Gold Bonds are relatively a better option. Government came up with an incredible plan to capitalise on gold. Your investment is used to better the country. In bonds every year you get about 2% interest which is good. But the disadvantage here is that there is a lock-in period. You can’t sell your bonds before that. You can sell it as a share in stock market but the process is a little difficult
The second disadvantage is that the returns depend on gold price movement. If the gold prices have gone down or stabilised during your lockin period then you might incurred very low profit of even loss (eg: if you started a gold bond in 2011 to 2019)
A Gold ETF is an exchange-traded fund (ETF) is one of the most ideal investment options. It is like you are buying the gold price itself. And there is no lock in period here meaning that you can buy sell at any time. You can get these in stock exchange.
It has ,any pros; Significant saving, enormous liquidity – sell at any moment and take the money out, Taxation is relatively lower (10% If sold more than one year, within one year 15% tax )
The downside is that it is an investment option. You can’t buy it as physical gold.
An economic output is a result of collective human endeavour. Psychologically people have seen the bottom so now there is only rise. Meaning that economic output is going to be more in the days to come.
From global economic context the economy will grow anywhere between 3-6% in the next five years on an average. There will be high raise this financial rise since we have seen a fall. Then it will settle down in a more realistic level.
In Indian context the growth can be about 8-12% for the next five years.
We are heading over to real good times in the economy. So what does that mean for gold?
Gold is not considered as an asset of first choice. Because people will have different priorities; Industrialists will want to set up a new factory, people will buy cars, houses etc. There will be requirement for consumption products. So indirectly this will drive down the demand for gold. Gold may not have the phenomenal run we saw in the last two years.
In a nutshell there is a 15% possible rise of gold prices for the next 18-24 months. On a long run say from a 10year 15 year perspective gold can deliver a return of more than or at inflation rate. Now inflation rate is 7-8% so the return can be about the same.
By Sivaramakrishnan R
Sivaramakrishnan R is a Management Consultant for Emerging Corporate, Portfolio Manager & Angel investor. He is the co-founder and CEO of Sincere Syndication a strategy & management consulting firm. A management & strategy professional he has raised about Rs. 4400 crores of funds in the form of debt & equity in India, Singapore and Indonesia. Besides, have been at the forefront of M&A transactions worth over Rs. 4200 crores.