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If there is one question I see asked the most, it has to be this. Which is the best form of gold to own?
If there is one question I see asked the most, it has to be this. Which is the best form of gold to own?
More often than not, the way this is answered is not really in the interest of a buyer.
More often than not, the way this is answered is not really in the interest of a buyer.
If you ask a mutual fund distributor or a fund manager, he is probably going to pitch an ETF (exchange-traded fund).
Ask a broker and he could pitch you either a gold ETF or perhaps the Sovereign Gold Bond (SGB).
Ask a jeweller, and you could end up with some jewellery or perhaps a gold coin with a high mark up. Or even digital gold!
Such default mode solutions are not in your interest.
You need to understand the reason you want to own gold, and then decide which way to go.
But first, a word on why gold.
You see, everyone needs to own gold.
If Warren Buffett does not like this idea, so be it.
We are an emerging economy. And the rupee is NOT the reserve currency of the world. We need the protection gold provides.
Typically, one needs to have 5% to 10% of their wealth in gold. Some, prefer to have a larger amount.
Like we say, to each his own. You should do what gives you comfort.
Meanwhile, here’s the pressing question –
How to choose between physical gold, Gold ETF and SGB?
To try and get to an answer that’s right for you, here’s what you need to ask yourself.
Do you believe the system of money in the world, with the US dollar at its centre, is unviable and will collapse at some point in time in the future?
Do you believe that India’s future is dark and we may become a failed state like say Nigeria or even Argentina, which has seen its economy collapse multiple times over the years?
Let’s dig into each of these.
First, there’s a few and growing number of people believe that the excessive money printing by the central banks (especially the US) will ultimately lead to a collapse of the monetary system as we know it.
This group talks about the fact that no modern currency has retained its hegemony beyond 50 years or. By this metric, the US dollar is already past its expiry date.
If you too agree that this mindless printing of money will sooner or later lead to a collapse of the monetary system, then all discussions can stop here.
Just go out and buy pure physical gold, at a minimal mark-up.
You see, a collapse of the world’s reserve currency will lead to outcomes few of us can even imagine right now. But it would be fair to say that many things that we now take for granted would not exist.
Gold is perhaps the only hedge against a fully blown monetary collapse. Gold is also very liquid. It’s difficult to imagine a scenario where gold ceases to hold value and/or it’s freely exchangeable.
You see, gold derives its value not from the amount of currency floating in the system (though there is an indirect impact), but from the stock of gold available above and below the ground.
The fact there is a limited amount of gold helps. And to get the rest out from below, takes time and costs money. Thankfully, the central banks can’t just turn on the printing presses and spit out more gold!
Also, do not forget, gold is the only proven currency around. It lasted hundreds of years before paper money came in. So, it will be like going back to a more rational world, where money i.e. gold actually has real value (our paper currency is not backed with any real value. Only a promise, in case you are not aware).
For those thinking that the Chinese yuan (currency of a war mongering communist country) or the Euro (a faulty system) or for that matter the Indian Rupee (not a freely convertible currency) will take the place of the US Dollar, as the reserve currency, well, that’s just plain day-dreaming. That’s not going to happen.
In this scenario, stick to physical gold. Not much ambiguity there.
If the world monetary system is not going to collapse, but you still see a dark future for India, whatever the reason, the answer is the same. You need to own physical gold.
Physical gold can be tucked away under your mattress so to speak. In case of emergency, it is perhaps the easiest asset to convert into cash.
This takes care of the doomsday scenarios.
If we are past this, and you believe in neither of the above outcomes, that means investing in other forms of gold is also an option.
So, let’s move forward. Take a look at this grid.
I think if you study this you will probably come to broadly these conclusions. Keep in mind there’s no doomsday scenario in play anymore.
First, if you don’t need liquidity, SGBs, which are issued by the Reserve Bank of India, are the best option. They pay out a 2.5% pa interest, which just increases their appeal for those who want to buy and hold gold for a long period of time.
Second, if you need liquidity, and you have a bank locker already (or a good locker at home), physical gold is best. Why pay a fund manager 0.5% (or more) per annum to hold gold for you?! All these costs add up after all.
Now, there are some nuances to this that you need to factor in.
For instance, if you do not have the ability to buy pure unadulterated gold at a fair price, then the physical gold option does not really work for you.
Or if you are worried about the safety of your holdings of gold, then again, physical gold may not work for you.
Before I sign off, a word on digital gold and jewellery.
Digital gold does not fulfil the “keep under the mattress for doomsday" test. So, it’s not a replacement for physical gold at all.
It’s more like a gold ETF, including levying an annual fee. A quick online check revealed that the charges for digital gold were waived off only for the first few years.
Jewellery on the other hand is physical gold but the fact that there are making charges involved, and often purity of gold is a question mark, I would say this is one option perhaps. But not the best option.
If you want to own jewellery, own it to flaunt it! The investment aspect is a very distant secondary consideration.
With that said, I hope this simple decision-making process will help you make a more informed decision about owning the right form of gold.
Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.
You should always consult your personal investment advisor/wealth manager before making any decisions.
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