How Good is Gold as a Investment ?

 Gold:

Indians are one of the highest buyers of Gold in the world. Conservative estimates say, Indian Households( other than RBI) hold around 25,000 tonnes of Gold.

Reasons could be  emotional, civilizational memories( constant attack by invaders made gold the easier asset to buy and hide) and the myth that, its a good asset to invest in.

Lets look into the “investing” part of it.

Any asset , be it gold or real estate or equity markets etc have to appreciate over the years to make it a “Invest-able asset”

 Gold can be bought as coins or jewelry or the more recent form of buying it in Demat form.

In any asset- you have something called a ‘front load” cost. That is, the amount deducted,when you buy that asset.

Example: Mutual funds have a front load fees of around 2% or less.  Real estate will have ‘front load” cost like broker fees, registration tax/costs etc. 

What about Gold? They have ‘making/waste’ charges and GST.

These front load cost makes a big difference in your appreciation of your asset.

Example: Suppose a asset loses 10%. ie 100 becomes 90.  That same asset has to appreciate 11.11 % to reach from 90 to 100. Point bieng made is ,“front load “ costs lower your rate of return on your investment significantly.

Gold has variuos Front load cost. 

Gold coins have making charges (~8%) plus GST(3%)- total 11%.  

Gold jewelry ‘making’ charges go from 8% to sometimes 20% ( for antique designs)-                             so total front load cost go to 11% to 23%. Higher the front load- more difficult it is for appreciation.

Over a period of last twenty years- Gold in India has given a  CAGR( Compounded annual growth rate) of 11.2 %.

Whereas Sensex has given a CAGR of 16% , in the same period.( remember : front load cost of a simple Sensex index fund could be  max 2%)

For people who dont want to do any calculations-here it how it looks.

Suppose you had invested Rs 10,000 every month in Gold and Sensex index fund for past twenty years- Gold Investment would have  given you Rs 79 lacs,                                                                                whereas Sensex Index fund Returns would have given you Rs 1.70 crores-  (a cool Rs 90 lacs 'extra' over the gold investment).

Of course ,having a little gold acts like a hedge...perhaps max 20% of your total investment.

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