“Which is the best way to accumulate gold for a marriage?” is a question often asked by parents, brothers and even the bride or groom to be. This is a discussion on a few smart ways to accumulate gold for a marriage.
Some of you are thinking, ‘the best way to accumulate gold is not to!’. The importance we associate to gold is as personal as personal finance. So let us address the issue objectively without a holier than thou attitude.
First, some basic ideas associated with gold.
- Investing in gold is different from accumulating it. Mixing the two is a common mistake, thanks to some smart marketing.
- Gold is not a depreciating asset.
- Gold is not a fixed income asset.
- Long-term from investing in gold has given about 8% return before tax. Therefore investing in gold is not a hedge for inflation. Accumulating gold is.
Method 1: Invest in a portfolio that can do better than gold
If you need the gold several years away (min 7 years and more more), a portfolio with a good dose of equity (about 60% or more for 10Y+ goals) has the potential to beat the returns from gold after tax.
The reasoning is simple. Equity approximately matches long-term GDP growth. This is about 14-15%. Even a return from equity of about 12% resulting in a net portfolio return of 10% should be enough to buy all the gold we want.
The second advantage with this method is that we are not accumulating gold. We are accumulating a corpus with which we can do as we please. Perhaps years from now, social norms would be quite different and gold will not be as important as it is now. Perhaps our children will grow to dislike it. In such event, the corpus can be used in other ways.
This is the method of my choice. I will neither tell my children that I am investing for their future needs (until the time is right), nor will I invest in their name. This way, I retain complete control of the corpus. To me, this seems like the most efficient method to accumulate for gold purchase.
Method 2: Buy physical gold from time to time
Gold is not a depreciating asset*. So if the goal is to eventually buy gold, one might as well buy it from time to time, when the gold price dips. I think the best way to do this is to buy jewels and not any other form. The mother can buy jewels for herself and pass it on to the daughter later on. Or purchase it straight for the daughter. She can bear the costs of refurbishing it or redesigning it out of her own pocket when she is able to.
Storing reasonable amounts of physical gold is not that big a deal as AMCs will make you believe. A couple of lockers will do the job.
If the goal is less than about 7 years away, this is obviously the preferred choice.
(*) Gold glitters because its electrons respond to external light and reflect it off. When metals react with the atmosphere, a thin layer of oxide is formed which would make it look dull. It is still gold. If all that glitters is not gold, then all that is gold does not glitter!
Ways in which one should NOT accumulate gold
1 Buy chits or use gold schemes of jewellers
A simple RD gives you all the freedom to make an annual purchase. A liquid fund allows you to buy on price dips. A chit scheme or a gold schemes comes with constraints and are not regulated. It allows a jeweller some working capital to do as they please until the purchase is made. See no reason why we should do that.
2. Use Gold ETFs, Gold funds or the upcoming Sovereign Gold Bonds.
These are ways to track gold price and possibly take advantage of its volatility. These are investment methods. Not accumulation methods. If I wanted to invest for a latter purchase, I would prefer a portfolio which can beat gold returns after tax. I will not track gold price electronically, expose my capital to fluctuations in gold price, pay tax and then buy gold with it. Read more: Do not buy Gold ETFs because you need gold for your child’s marriage!
Personally I believe gold has no place in an investment portfolio because the reward it offers is disproportionate to the risk taken: Investing in Gold is riskier than investing in Stocks!
Further posts on the subject:
Gold ETFs and gold funds make sense only if I wish to diversify my investment portfolio. Being in electronic form, they are not a hedge against inflation. Only physical gold is a hedge against unusually high inflation.
The argument that we invest in 24 carat gold via ETFs and buy 22 carat jewellery is not quite valid. As Ashal Jauhari pointed out, the ETF NAV is closer to 22 carat gold price due to expenses, tracking errors and liquidity issues. The true 24 carat gold is equity!