Indians have a tradition of buying gold, it is almost a borderline obsession. We import about 1 ton of gold every year!!!, and this is mostly for jewellery or to be stored. It has become a national problem as the wealth is stored away and is not being utilized to create more wealth. For instance money put in a bank will be lent to someone who can use it to generate wealth (run a factory, build houses etc.,), the investor also gets a part of the benefit as interest, whereas this does not happen with gold. Government is trying to change this through gold deposit initiatives etc.
Gold is an excellent store of value, but is not a wealth creator. Gold has done extremely well in terms of retaining value, especially in recession years. If one is looking to build wealth then gold may not be the key vehicle of choice, as it significantly under performs in growth years.
Let’s look at how gold has fared over the last couple of decades. In 1994 gold was Rs 430 a gram and now it is close to Rs 2,730, it has returned an impressive 9% per year. You can realize this in return if this is held in ETF or as gold bars. If this is held as Jewellery most of this gain and a bit more will go into the various charges and at best one can realize 1% to 2% returns, which are is poor by any standards. On an average the return on gold underperforms the market index.
- If one is more than 10 years away from retirement and is looking to build wealth, then gold should be a maximum of 10% of the portfolio. (we prefer 5%).
- If one is retired or much closer retirement they could have upto 20% of their assets in gold (as a protection from a severe downturn).
- We suggest purchasing GOLD ETF as opposed to Jewellery, as this is more liquid and has tax advantages.
IndusWealth: Making your money work for you