Physical gold has been a form of financial and traditional investment for centuries. But in today’s time and age, should one be investing in this asset?
In 2022, gold is expected to perform well in the medium-term due to inflation concerns and uncertainty over the Omicron variant of coronavirus. According to various experts, gold prices could touch $1,77-2,000 over this year. But is that reason enough to buy the yellow metal in its physical form?
While physical gold was considered a great form of investment earlier, that is no longer the case, due to various reasons. Returns have been low—almost nil in 2021—and there is high risk in holding physical gold. Below are five reasons why one should avoid buying physical gold as an investment.
Physical gold is an expensive commodity in any form. Storing it requires a secure space, such as a locker at home or in a bank, due to risk of theft, and that involves a cost. Moreover, anytime you need the gold, you will have to physically go and get it. It will not 'come' to you as other financial products do.
Buying gold, especially as jewellery, has additional and overhead charges. Mrin Agarwal, financial educator and director, Finsafe India, a financial education firm, says buying physical gold “works out to be much more expensive as there are many overhead charges involved, such as the making or wastage charges, which typically work out to 25 per cent to 30 per cent of the cost”.
Purity of gold can be a concern, especially in units that are a few years or a few decades old. “As far as physical gold is concerned, wherever you happen to buy it from, you do not know about its purity… We (investors) are not experts in that area. Therefore, we tend to believe in the jeweller," says Suresh Sadagopan, founder of Ladder7 Financial Advisories, a Sebi-registered investment adviser.
Unlike many financial instruments that give returns or dividend, physical gold offers no returns while it is with you. Even the humble savings account offers interest.
If you want to take advantage of gold’s price increase, you can invest in digital or paper gold through instruments such as sovereign gold bonds (SGBs) that provide interest over and above the gold price. “While you receive no additional interest on physical gold, with SGBs, you receive a 2.5 per cent return, over and above the asset price," says Agarwal.
Paper gold gives you the chance to benefit from the price increase without the worries of storage, impurities, theft, etc. “People buy physical gold thinking it is an investment, but it is not an investment at all. It’s a better idea to invest in financial assets. Among these, if you wish to invest in gold, I would say SGBs are the best possible instrument," says Sadagopan. With 'paper' gold, the risks and expense of storing are dismissed as the investor can 'store' the investments in a demat form. “If it is just for a pure investment purpose, there is no point in having physical gold. You might as well have digital gold, which has no safety or purity worries,” says Agarwal.
Any investment is done with the purpose of earning returns. In the past few years, returns from gold have been much lower than, say, equity. In the past decade, in rupee terms , with a 5.7 per cent compounded annual growth rate (CAGR), physical gold gave returns that were much less than Nifty's 15.5 per cent.
Given the difficulties associated with physical gold as an investment, an investor may be better off looking at other options such as paper gold.