Here, we will discuss whether it is a good idea to invest in gold in the present circumstances
In the last few months, gold prices have witnessed a significant rise, making people quite interested in investing in gold
This is especially with the background of turbulence in alternatives such as stock markets
So, the issue is whether to invest in gold now and if so, where and how
Here, we will try and provide some brief answers to such questions
There is a traditional social and psychological disposition we have towards gold
People invest in gold and especially so for emergencies
In terms of cold economic logic and modern economic value, gold investments appreciate when economic uncertainties increase
When there is fear and apprehension
When people's confidence in important financial investments such as stocks, bonds, fixed deposits declines, gold prices appreciate significantly and gold investments increase
Remember, your investments are denominated in your currency. When investors lose confidence in the store of value attribute of currency, they invest in gold
This is typically the case when people expect excess printing and supply of currency in the future, there is deficit in government finances and fresh currency printing will plug the gap, gold becomes attractive
The general impression of gold investments is that they are "safe" and are considered as "safe haven" investments
But is gold really a safe haven investment?
If you look at the history of 40 years or so, you will find that this is not true
Before dwelling on this point further, it is worth pointing out that gold investment worldwide are denominated in dollars
Since you buy the gold in rupees in India, any weakening of the rupee automatically leads to increase in gold prices
If you has invested $100 in gold in 1980, in 2011, the value was $17
There have been periods when gold investments have depreciated
Between 1980-82, it fell by more than 50% and more than 40% during 2011-15
The truth is that gold like all market-linked investments has its periods of ups and downs
In the short-term, the market of gold, like other assets is like voting machine, based on investor sentiments and in the long-term it is like weighing machine, based on fundamentals
So, if the economy is doing well, the question of gold performing well doesn't arise
If economic growth, company profits and their share prices increase which will invest in them directly or indirectly through investments like mutual funds
You will invest large amounts in gold only when prospects of economic growth are very dim
Investments in gold shouldn't exceed more than 10% of your overall investments
When the economic recovery happens, long-term investments would ideally be made in equities and short-term investments would be made in debt
The role of gold in your mix of investments including equities and debt is this that in a year when equities and debt both don't do well, giold delivers returns that provides overall growth to your mix of investments
If you stay invested in gold for less than three years then the capital gains are short term capital gains and it gets added to your income and gets taxed according to your tax rate
For gold investments of more than 3 years, the capital gains are long term capital gains and you get the benefit of inflation indexation, reducing taxable capital gains which gets taxed at 20%
Thus you need to invest in gold upto 10% of total investments and for the long-term
In case of physical gold investments, you have problems of purity, storage and loss of value during sale
You can invest in gold through financial investments such as Sovereign Gold Bonds and gold mutual funds or gold funds
Sovereign Gold Bond, unlike physical gold, gives you regular income since it has coupon rate of 2.5% p.a
This is over and above the capital gains you make
The idea is to invest in an option where buying and selling the investment is relatively easy
