Gold Crash: Should You Invest Now?

'If you invest in sovereign gold bond, you are going to get the price rise of gold over an eight year period.'
'You're also going to get that two-and-a-half percent which the Government of India is willing to give you, treating the money that you've invested in the sovereign gold bond as a kind of a FD or a deposit.'
'That kind of return you can never get anywhere else.'

With Finance Minister Nirmala Sitharaman announcing a cut in basic customs duty for import of gold and silver from 10 per cent to 6 per cent, gold and silver prices in India have almost crashed by five per cent (at 6 pm, India time, the price of gold (August expiry) and silver (September expiry) futures trading on the Multi-Commodity Exchange were trading five and four per cent lower respectively; the MCX closes for trade at 11 pm, India time).

Should this sharp fall in gold prices by more than Rs 3,800 in a single day be looked upon as an opportunity to invest in the yellow metal?

If at all this fall provides an opportunity, then how should retail investors go about investing in gold?

Should they buy gold biscuits, bars, coins or invest in financial options like Gold Exchange Traded Funds (ETFs), Gold Benchmarked Exchange Traded Schemes (BeEs) or Sovereign Gold Bonds (SGBs)?

Chartered Financial Advisor Suresh Sadagopan tells Prasanna D Zore/Rediff.com the reason behind gold's fall, if the fall will continue and why SGBs offer a best investment option if one has to invest in gold now.

What's the reason that gold prices have crashed by almost 5 per cent?

The approximate reason is the slashing of the basic customs duty on gold from to 10 per cent from 6 per cent without changing the Agricultural Infrastructure Development cess of 5 per cent, bringing the effective customs duty to 11 per cent.

How can investors benefit from this fall in gold prices?

This is great news for people who want to buy jewellery.

Gold as an investment asset class continues to hold great value despite gold prices coming down in India. Gold is a great long term investment.

If you really look at the geopolitical situation and the changes which are happening in the world, you are not so sure about the dollar, or the euro (acting as investment hedges). In fact, you are not sure about any of the fiat currencies.

Gold is actually gaining more and more weight because of what is really happening in the world. It's early days, but there can be an alternate financial system which has a backing of gold, like the BRICS currency.

It may not only be a BRICS currency, it can be other alternative financial systems which can be based on gold.

In my opinion, gold has a wonderful long term potential as an asset class. We are suggesting people to invest in gold since last two years purely from the long term point of view; not just because gold prices have been going up. We have identified that gold is a great asset class and its price will only go up in the future.

We are still looking at lot of turbulence internationally and (because of which) gold will only go up. Gold is a great investment asset class going forward and one should consider it very seriously.

How would you quantify this long period of time? Will it be for five years, ten years?

There is a problem there. I am not able to exactly quantify because a lot of things are also determined by what is going to happen at the geopolitical level. If you really look at the US, that country is not in a very great situation today.

From a reserve currency point of view they are probably at one of the weakest points as far as the salience of the reserve currency status of the dollar is concerned because of what they have done with Russian assets.

If Russian assets can be frozen, it can pretty much happen to any country is what virtually every country has understood.

It's a blunder they (the US) have committed (by freezing Russian assets) and that is going to haunt them.

After the finance minister's Budget announcement slashing import duties on gold and silver to 11 per cent from 15 per cent, do you think the fall in gold prices is temporary?

Not really, because if somebody is actually importing through normal channels then a 4 per cent differential in the prices of imported gold will show up as a lower price of gold in India.

Of course, there are other dynamics. So this (fall of five per cent in price of gold today) is just because of the (slashing of) customs duty. The other dynamics is how the international prices of gold itself will fare in dollars.

If I were a retail investor and I've already put money in gold ETFs or Gold BeEs (Gold Benchmarked Exchange Traded Schemes), what would be your advice for such kind of retail investors in the context of today's fall?

We all tend to read too much into the near term. The context of gold's relevance over a long period of time is undiminished. If the price of gold is coming down today, I wouldn't say because of that you should not invest or because of that you should invest.

If you have Gold BeEs, continue to hold on to them. You may see a temporary dip in the NAV but that's it. In the long term, gold is a great asset class.

Is this the right time to add more of Gold BeEs or Gold ETFs?

If you don't have enough gold in your portfolio or if you have no gold in the portfolio then probably the timing can be right in somebody's case. Otherwise, if somebody is having 5 to 10 per cent (of investment in gold as part of total investment portfolio) and they have determined that's a good enough level for them; then they should not take the knee-jerk reaction saying that it has come down 5 per cent and add because the price has come down by 5 per cent (in a day).

It will not really suddenly go up to the previous price level because at a fundamental level, it has come down because of customs duty.

For a retail investor, what is the ideal way of investing in gold?

The best option available is the sovereign gold bond.

If you invest in sovereign gold bond, you are going to get the price rise of gold over an eight year period. You're also going to get that two-and-a-half percent which the Government of India is willing to give you, treating the money that you've invested in the sovereign gold bond as a kind of a FD or a deposit. That kind of return you can never get anywhere else.

If you buy bullion -- gold bar or coin -- then the price of gold is higher -- which is quoted at the exchange -- by 10 to 15 per cent.

In the case of an ETF, the taxation is not really that very favourable and then there is also a charge in the case of an ETF. It may be 0.5 per cent to 1 per cent charge (brokerage, expense ratio, etc) per annum.

Considering these charges the sovereign gold bond definitely wins hands down.

What would be ideal way of investing in sovereign gold bonds?

You can directly buy in the secondary market. You don't have to necessarily wait for the window to open (The RBI opens the window for sale of SGBs four times in a year). Normally when the window opens, you may get to buy SGBs at a slightly better price because it's possible the government may give a small concession to the retail investors.

But if you are really looking at investing you should really look at those kind of concessions because you don't know when the window will open now.

How much of my money should I invest every month in SGBs?

I would talk in terms of the overall investment portfolio. Broadly speaking, 5 to 10 per cent of one's assets can be in gold.

So now if you're not invested at all, then you will have to accordingly tailor the SIP or the lump sum investment to reach the target which you have set for yourself.

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