When to invest in gold and when to buy it

Published: September 9, 2016 at 11:14 am

Last Updated on August 22, 2022

Many investors appear confused between investing in gold and buying gold. Here is a discussion on when to invest in gold and when to buy it.

Everything starts with the need. If we can clearly state our requirement, the solution often presents itself. Here is an example how to clearly define a goal: Financial Goal Planning: How to buy an Audi Car.

Let us consider common requirements and uses of gold.

I need to accumulate gold for my child’s marriage

The traditional way of accumulating gold is to actually accumulate it! Using gold saving schemes offered by jewellers, mothers often purchased gold from time to time. This is a fantastic way of doing things and I can see nothing wrong with it. The intended purpose is consumption and one starts ‘consuming’ periodically.


🔥Enjoy massive year-end discounts on our courses and robo-advisory tool! 🔥
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)
 
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!

The alternative is to accumulate money and buy the required gold at a later time in one shot. There are two ways to go about it.

1) Today we have ways to track the price of 24 carat gold. Via gold etfs, gold funds and  sovereign gold bonds. Investing in these offers a way to hold an amount equivalent to weight of gold.

2) Depending on the duration, we can choose a mixture of equity and fixed income for generating the corpus.

Personally I see no benefit in choosing instruments that track gold price if the aim is to eventually buy gold jewellary.

If I have a 2 year old daugher and wanted to plan for her marriage, I would either adopt the traditional way mention above or invest in a portfolio of say 60% equity and 40% fixed income. Tracking the price of a commodity which has not not delievered real returns over ‘the long term” is not an enticing prospect for me. I would rather own it and enjoy it without worrying about returns since that is ultimate motive anyway.

Read more: Smart ways to accumulate gold for a marriage

I need a hedge against inflation

Gold is supposed to be a hedge against inflation. If the pertol price increases by Rs. 5 or if the exchange rate increases by Rs. 10, holding physical gold or gold (price) investments will not help much.

When the economy collapses and a loaf of bread costs Rs. 10,000, I would need physical gold -not bonds or etf.

Gold is a necessary hedge against hyperfinflation – as seen in Germany (after WW1), Zimbabwe (a few years ago) and Venezuela (right now). When the local currency becomes worthless, gold becomes the currency.

If and when such a thing happens, I would need oodles of gold for everyday life.

Is it prudent to drop all my other investment and focus on buying enough gold in fear of possible hyperinflation?

I am a pessimist, but not pessimistic enough to be paranoid.

There are many who claim that one should have 10-15% of gold exposure in a portfolio. If this amount is in etfs/bonds they may not aid if hyperfinflation strikes. And in such an event one would need a lot more than 10-15% of physical gold.

I need a hedge against volatility

Gold is considered to be a “safe haven” when there is fear. Fear of an impending crash or fear after a crash. So during these events, gold price surges. This can be efficiently used to reduce portfolio volatility.

Not by holding physical gold, but by holding a freely tradable instrument that tracks gold price and by rebalancing among equity, fixed income and gold periodically. As of now, ETFs is a simple way to accomplish this. 

Take the case of funds like Axis Triple Advantage, Canda Indigo, Quantum Multi-Asset etc. They approximately hold 25-30% of gold ETFs at all times.

axis-triple-advantage
Source: Value Research

Notice how the Axis Triple Advantage fund is much less volatile than the VR balanced index. This is because of high gold exposure and periodic rebalancing. 

Lower volatility almost always means lower returns: Over 5 years, the VR balanced index has given ~ 11% return while the axis fund ~ 9%.

So increasing gold exposure in the portfolio reduces volatility and also returns. If the exposure was only 10-15% as many experts recommend, it will neither impact volatility or returns as much.

Therefore, in my opinion, might as well not have any gold in an investment portfolio. Gold jewellery is naturally excluded.

Read more:

Gold is riskier than Stocks!

Gold Price Movement: USD vs INR

Should gold be part of your long-term investment portfolio?

Charts: Equity vs. Gold. Vs. Debt

Do share this article with your friends using the buttons below.

🔥Enjoy massive year-end discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)
 
Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
  Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)