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The best way to invest in gold

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Photo: Bloomberg

Amid high inflation and market volatility, many investors are turning to gold. Despite the spectacular rise and then fall of cryptocurrency, for a majority, it was gold that was always the answer to inflation. However, in the short term, gold can lag behind. Mint explains.

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Amid high inflation and market volatility, many investors are turning to gold. Despite the spectacular rise and then fall of cryptocurrency, for a majority, it was gold that was always the answer to inflation. However, in the short term, gold can lag behind. Mint explains.

Why is gold a hedge against inflation?

Inflation is ultimately the result of excess money printing. Much of today’s inflation can be traced back to an unprecedented expansion in the US Fed’s balance sheet during the pandemic. In India, RBI also loosened monetary policy during the pandemic. Since the supply of gold is finite, when a greater amount of money chases the name quantity of gold, its price rises. Before the Second World War, countries around the world had linked their currencies to their gold reserves. The Bretton Woods system continued this indirectly. However, since 1971, fiat currencies have been issued without proportionate gold backing them.

What are gold’s drawbacks?

Gold is a ‘dead’ asset. Unlike stocks, it does not channel money to businesses, and you don’t benefit when those companies grow and make profits. You do not receive any dividends on gold. You also do not get any interest on it, other than the 2.5% paid by the government on sovereign gold bonds. There are long spells in which it does not give high returns and lags the stock market and even inflation. For instance, the Nifty has delivered a CAGR of approximately 10.5% since 2010, compared to 8.2% for gold. However, the low correlation between gold and stocks makes it a good diversifier

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Enduring glitter

Is it safe to buy digital gold offered by fintechs?

Over the past 5-7 years, fintechs have been offering so-called digital gold, where you buy gold through an app which is stored in the vaults of a partner company. However, it is unregulated. It faced a major setback over the past year with a Sebi clampdown. For instance, stock brokers regulated by Sebi cannot offer this product. Lack of regulation raises the risk of this product.

How do you invest in gold?

There are a number of ways in which you can invest in gold. You can buy jewellery or gold coins and bars in the physical market. You can buy units of gold Exchange Traded Funds (ETFs) or gold savings funds. You can buy sovereign gold bonds (SGBs). Each of these instruments is linked to the price of gold, but each serves a different purpose. Physical gold is good for consumption (those who want to wear jewellery), ETFs for those who want to trade in gold and SGBs for buy-and-hold investors due to the 8 year lock-in of these bonds.

What are the taxes on gold in India?

If you buy physical gold, you have to pay Goods and Services Tax (GST) of 3%. This does not apply to SGBs or ETFs. When you sell gold at a profit, you have to pay capital gains tax. This is at your slab rate if you sell within three years. If you sell after three years of purchase, you have to pay a long-term capital gains tax of 20%, and you get the benefit of indexation. The capital gains tax applies to physical gold and ETFs. However, it does not apply to the gains you make when SGBs mature at the end of eight years. These gains are tax-free.

 

 

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