When to invest in gold and when to buy it

Published: September 9, 2016 at 11:14 am

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.

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 if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My 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, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? 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 parent’s 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!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and 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 of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 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, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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, 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)
Free android apps