However, things are a little different now and I’m not sure whether gold has the same characteristics as an investment any more. The rise of ‘paper gold’, which are gold-derived financial instruments, has converted gold into yet another financial asset. As the vast ocean of liquidity that is sloshing around the world’s financial markets rises and ebbs in response to financial crises, wars and pandemics, so does gold. Which is fine I guess because that’s the way things are now, and financialised gold products do have many characteristics that are better as investments even though they lack the pleasure that physical gold can provide.
Still, I have never said a good word about gold as an investment and am not going to start today. The best I can say is that historically, gold was a good store of value and some of that survives till today. However, it is not good as an investment. Over long periods of time, rising gold prices give an illusion that the returns are good. For example, over about 40 years (from 1981 to 2021, 31 March numbers), the price of gold has gone up 29 times, from Rs.1,800 for 10 gm to Rs.48,720. That sounds amazing, doesn’t it? Well, over the same period, the Sensex has gone from 173 points to 49,509. That’s 338 times! There is no comparison, at all. Gold is somewhat better than inflation, depending on how you measure inflation, but that’s about it. It just stores value—there is no meaningful appreciation.
Traditionally, gold is supposed to do well when the times are bad for equities, thus functioning as a kind of a hedge. This is true, sometimes, but it’s not a sureshot thing in severe crises.
The bottomline is gold is not a great investment and no one should hold any significant amount of gold for investment purposes. However, if you cannot completely break out of a few thousand years of preconceived notions, and must necessarily buy gold, then Sovereign Gold Bonds are the best way of holding gold and jewellery is the worst. In fact, jewellery was never a great option. Even for physical gold, for investment purposes, bullion coins have ways been the sensible choice. Essentially, there are two types of non-physical investment in gold available in India, Gold ETFs/gold funds and Sovereign Gold Bonds. Till 2015, before the bond scheme was introduced, ETFs and funds were the best way to own paper gold but now, SGB is the better choice. It replicates the returns (positive or negative) of gold, but also pays you an interest of 2.5% per annum.
Of course, do understand that I’m saying all this under duress, so to speak, just because people keep asking. Personally, I do not invest in gold, and I don’t think anyone should but if you have to do it then SGBs are the least worst way of doing so.
(The author is CEO, Valueresearch.)