Gold has primarily been considered to be a women’s domain mainly due to the jewellery that has been a part of our heirloom for many years and is respected for its value and rich history. However, gold is emerging as a special and valuable commodity.
It is one of the preferred investments, to diversify the portfolio. Its prestige value, charm, high liquidity are its strong selling points, not to mention its transferability from generation to generation in the form of jewellery.
Though there are phases when gold prices fall, they don’t last for long, and tend to make a strong comeback.
So what are key reasons we should invest in Gold?
1. Tangible Investment- Unlike other investments which are in virtual or paper format, Gold is a physical investment. Even if invested in the new age format (paper gold), the backend is all linked to physical gold.
2. Security against Inflation/Deflation: Gold has historically been an excellent hedge against inflation, apart from the long term equity investments. Also during deflation when prices decrease, business activity slows down, people tend to hoard cash and the safest place to hold cash has been gold and gold coin at the time.
3. Inverse relation with equity investments- Historically the trend shows when the markets are up, Gold prices move lower than normal and inversely. Hence gold is considered a haven in the event of a stock crash.
4. An Uncertainty Offset factor: Be it geopolitical, economic or market uncertainty, Gold maintains its value thus proving it’s as the "Crisis Commodity".
5. Portfolio Diversifier: Because of its almost inverse relation with equity markets and other major investment classes, gold is a highly effective portfolio diversifier. Gold protects the portfolio from volatility, market crash and other not-in control factors.
6. No special knowledge needed- To invest in Gold; one doesn’t need any technical knowledge. Because it’s based on the simple rule of Economics- Demand and Supply, Gold is also sometime the preferred investment option.
Connection between Weaknesses of the U.S. Dollar & Gold prices: Although the U.S. dollar is one of the world's most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a number of reasons, including the many country's large budget and trade deficits and a large increase in the money supply.
How much should we invest in Gold as part of Portfolio Diversification: The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out, The 1970s was great for gold, but terrible for stocks and The 1980s and 1990s were wonderful for gold but not stocks. Gold should be in our portfolio between 15-20% of our wealth. Jewellery meant for use by women should not be considered as investment or wealth.
How to Invest in Gold: Traditionally, it was by buying physical gold in the form of coins, bullions, artifacts, or jewellery. However, there are newer forms of gold investments nowadays, such as gold ETFs (exchange-traded funds) and Gold Funds or Sovereign Gold Bond. Gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to store the physical gold. Hence, there is no risk of theft/burglary as the gold is stored in Demat (paper) form. Gold funds also invest in gold mining companies.
Is there any manipulation in Gold market pricing? Gold prices are determined in London & Chicago, even though India & China are biggest buyers of Gold as big Investment Bankers are located in these cities. They seem to be manipulating Gold prices through naked short or naked long by taking aggressive positions in Future market, without taking delivery or giving delivery. Investors should be aware of this fact for which enough material can be goggled. In India, Gold bars are available of 24 carats and quality of this can be easily checked. In 2014, Barclays was fined nearly $44 million for failing to prevent traders from manipulating the London gold “fix. In one particularly alarming instance in January 2014, the yellow metal plummeted $30, from $1,245 an ounce to below $1,215, in as little as 100 milliseconds.
Taxation
Gold Holding Rules
As per instructions from CBDT (Income tax authority) a family can hold Gold & jewellery:
Ø Married women 500 grams,
Ø Unmarried women 250 grams and
Ø Each male member 150 grams
Thus, for a family of 4, Gold 1050 grams of Gold (105 Tolas or 1 kg.) can be held and no question of source would be asked. Gold holdings can be higher than this limit but during scrutiny and other enquiries, the source of income etc. will need to be provided.
Taxation
Short-Term Gain- Gold holding for up to 3 years are liable to be taxed at slab rates. When you realise gain after holding above 3 years, it is LTCG and is taxed at 20% with indexation benefits. Currently, there is no Wealth Tax or Estate Duty Law, but if and when that is brought in, any excessive Gold Holdings could be taxed differently as compared to Financial Assets.
No income tax is levied on inheritance of gold or jewellery but subsequent sale of the inherited gold or jewellery is taxable. Person should maintain the documentation like invoice, receipt, etc. for purchase of gold and copy of inheritance documents like will, etc. for the gold which is inherited. For inherited gold the cost shall be the price they had paid to purchase the same. For gold or jewellery purchased by you or originally by your parent before April 1, 2001, you have the option of taking the Fair Market Value (FMV) of the jewellery as on April 1, 2001, instead of actual costs incurred to purchase the asset. FMV can then be indexed to determine your cost of acquisition. This helps to get the benefit of indexation.
Regulator & controls: There is no regulator in India. IBJA, an association of Bullion traders & Jewelers in Mumbai publishes daily gold prices and RBI, Banks accept this.