"Investing in Gold: A Comprehensive Guide to India's Obsession."

"Investing in Gold: A Comprehensive Guide to India's Obsession."

While investing, the first asset class that comes to your mind is “Gold”. In my childhood, I’ve always seen my parents buying gold even when they don’t need it. Of course, why wouldn’t anybody purchase gold? It has some of the best metallurgical properties like luster, ductility, etc. so it can mold into any shape and size to wear it along with your outfit, which in turn increases the net worth of an individual. Also, you can customize it according to your preference.

So, how did gold become such an essential asset in our day-to-day life?

The answer to it is very clear its beauty, rarity, and durability. It has served various purposes like cultural and historical significance such as intricate jewellery, decorative objects, artifacts, status symbol, etc. It is also considered a safe-haven asset that can protect against inflation, currency devaluation, and economic uncertainty. That is not it, gold has a high monetary value which is quite evident as it was the main exchange system for exports and imports between countries across the globe during the late 1800s and early 1900s as the domestic currencies were freely convertible into gold at a fixed rate called “The Gold Standard”.

Well, this was all about the importance of gold globally, but when it comes to India, it has the 9th largest gold reserve, which amounts to $37 Billion for 695.3 tonnes.

Love for gold in India is at a different level; according to the World Gold Council, India is the world’s second-largest consumer and Largest importer in the world.

Why is India the world’s second-largest consumer of gold?

India’s rich culture and deep affinity toward gold go hand in hand with practicality and security as an investment. Particularly in Hinduism and Jainism, they believe that gold ornaments should be worn for important ceremonies and occasions. Some of the most important dates in the Indian calendar are Diwali, Akshaya Tritiya, Pongal, Onam, Ugadi, Durga puja, Gudi Padwa, Baisakhi, and Karva Chauth. Apart from this, around 50% of the total gold demand in India is generated during the wedding season as gifting gold is considered lucky or ‘Shagun”.

Now, you have a rough idea about gold and how important it is in the Indian market. Let’s understand the demand and supply in India, as you know there has been a high demand for gold be it in the form of jewellery during weddings or in the form of coins, bars, MFs, and ETFs during investing in India according to the world gold council.  Say it is demand or affinity, the popularity has always been there in the Indian market (since we are talking about the Indian market) the real question is how does it meet its demand? According to the WGC, the majority of demand is met through imports. The country's annual gold imports range between 800 and 900 tonnes in terms of volume. India's domestic gold production is quite limited, historically averaging around 2-3 tonnes per year. The majority of this Reserve, around 88%, comes from the state of Karnataka, with the Hutti mines being the primary producer. The Kolar mines, on the other hand, have been inactive since 2001 following a dispute.

Now that you have gathered a significant amount of information about gold, it's natural for you to have another important question in mind: "Should I invest in gold?"

If the answer is yes, then you might be wondering what form of gold investment to choose from - physical gold, ETFs, Digital Gold, or Sovereign Gold Bonds (SGBs)?

Well, I am not going to give you tips on investing as you seek from your colleagues, friends, or relatives but one thing is for sure I’ll give a clearer picture.

Firstly, whether you should invest or not, Gold is now at its lifetime high at 60,000 levels per 10 gms with an expected return of 10-12%.In the midst of the Covid pandemic, while most stocks took a significant hit, gold prices skyrocketed to an all-time high of 56,191 per 10 grams. However, in May 2022, as inflation began to bite, gold prices plunged to their lowest level in 18 months. Instead of fretting over the decline, it would have been wise to invest in gold during the downturn, as evidenced by last week's surge, which saw gold prices climb to a high of 61,399, even amidst a global banking crisis.

Over the past two decades, countries like China have amassed a staggering 1,448 tonnes of gold. And why does this matter, you may ask? Because during crises such as the Covid pandemic, gold has consistently proven to be a superior asset class for investment purposes.

Jateen Trivedi, Vice President and Research Analyst at LKP Securities, recommends staying invested in gold for potential returns of 10-15% in a base-case scenario, and 15-20% in a bull-case scenario, given the weak and uncertain performance of risky assets.Where Nifty 50 has given a flat to negative return in the past 1 year, in contrast, gold has significantly outperformed all other asset classes by giving a staggering 15% return in the past 1 year. The Technical chart of MCX Gold shows a sharp rise in the past and is expected to rise in a similar fashion and may touch 68,000 by the end of FY24.


Now that you have a better understanding of whether investing in gold is the right choice for you.

Let's move on to your second question: what is the best investment option for you?

Investing in Physical Gold is not one of the best ways to allocate your money but here in India, most people often buy physical gold in the form of jewellery. “All those glitters are not gold” means the lucrative return which we showed earlier is not your real return as the government collects taxes from the long-term capital gains (more than 3 years) as well as short-term capital gains (less than 3 years) plus making charges is also paid by the consumer. These taxes are collected only if you sell your asset. In India, there are no such limits to own any maximum amount of gold but only if you can show some relevant documents for the same, and if not then according to a circular issued by the Central Board of Direct Tax (CBDT) a married woman is allowed to keep 500 grams of gold jewellery, an unmarried woman can hold up to 250 grams, and a male member can hold up to 100 grams. However, it does not include gold coins and bars which can be seized even if it is within the limit specified above.

Just like digitization has a lot of perks, investing in “Digital Gold” also comes with better investment value than Physical Gold.

When you purchase Digital Gold the only charges you have to pay is GST on the purchase price. Since, all these transactions are taking place digitally there is no upper limit on buying. No direct tax is collected if you sell in less than 3 years of purchase but yes LTGS is applicable if held for more than 3 years plus cess and surcharge.

In 2018, the Reserve Bank of India (RBI) issued a circular that prohibited banks and other regulated financial entities from dealing with or providing services to any individuals or businesses dealing in virtual currencies, including digital gold.

Well, the government was making huge amounts of money through GST and other charges, So why did they prohibit it in the first place? The main concern was that virtual currencies, including digital gold, are decentralized and not backed by any government or central authority, making them vulnerable to market volatility, speculation, and fraud. This volatility can be especially concerning for retail investors who may not have the financial knowledge or resources to navigate the risks and complexities of the virtual currency market. Moreover, activities such as money laundering, terrorist financing, and tax evasion impact financial stability and security.

However, the circular was later overturned by the Supreme Court of India in 2020, and some restrictions on virtual currencies, including digital gold, remain in place.

Another product of gold is ETFs or mutual funds; these are similar to that of buying physical gold in terms of rates and taxes. The only difference is that unlike physical gold these are much easier to buy since they are traded like stocks and can be stored in your demat account.The latest finance bill of 2023 has eliminated the long-term capital gain tax advantage from debt mutual funds and gold mutual funds. However, Gold ETFs will continue to enjoy indexation benefits as they are classified under the equity category. This may appear unfair since Gold ETFs and Gold Mutual Funds are similar products, yet one still receives the indexation benefit while the other does not.

So, the only product we are left with is Sovereign Gold Bonds (SGBs), this might make more sense because firstly, investors receive a semi-annual interest payment at a fixed rate of 2.5% per annum. Secondly, if the investor holds the SGB till maturity, which is 8 years, they will not have to pay any capital gains tax on the returns earned. It is widely suggested by financial experts as the best instrument to invest in Gold.

The lock-in period for Sovereign Gold Bonds (SGBs) in India is 5 years. This means that investors cannot redeem their SGBs before the completion of 5 years from the date of issue. So it is advisable if you are only planning for a long-term investment.

Source: Bloomberg

Gold has turned out to be one of the best asset classes for long-term investing, hedging your portfolio, hedging risk, etc. If you see the above chart the white line graph represents MCXGOLD which has outperformed MCXSILVER, and SENSEX remains at the top of the chart with higher risk and return.

Conclusion: For investment purposes, SGBs and GOLD ETFs are better products in terms of security, regulation, and return.

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