Yellow Metal: How to optimise your gold purchase

Sovereign Gold Bonds are a better way of investing in the metal as they pay annual interest and are tax-efficient.

On the auspicious day of Akshaya Tritiya today, many Indians would buy gold as it is said to bring good fortune. However, with lockdowns and restrictions in most states due to the second wave of Covid-19, demand for physical gold will remain muted. While online sales will remain open, most prefer to buy gold from the stores. With many options to buy the metal in the electronic form such as digital gold, Gold ETFs, Gold Funds and Sovereign Gold Bonds, investors should make a smart choice to optimise their investment.

Golden way
The yellow metal is a hedge against uncertainty and provides diversification in a portfolio. Gold’s stellar returns—28% (in rupee terms) in 2020 and another 24% in 2019— prompted many investors to do profit booking. However, gold prices have been under pressure since the beginning of 2021 as the dollar and US bond yields surged in a swift turnaround of the US economy. As higher yields compete with non-yielding gold, global investors bought dollars to buy those bonds putting pressure on the metal.

As gold prices fell and the government reduced the import duties to 10.75% from 12.5% to boost retail demand and curtail smuggling in this year’s budget, India’s gold imports surged to record level of 321 tonnes in the quarter ended March this year as compared to 124 tonnes during the same period last year.

So, should you buy gold today?
Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, says as global policymakers are resorting to monetary inflation or printing more money to tackle the economic fallout of Covid-19, it will set the stage for higher inflation and gold, a monetary asset, has a long-standing positive correlation with inflation. “Investing in gold can be a good way for investors to diversify their currency-denominated wealth into assets that can preserve value over the long term and aren’t eroded by inflation,” he says. Moreover, the depreciating rupee because of the second wave of Covid-19 and resulting restrictions raising concerns on the growth outlook and prompting foreign investors to trim their Indian investments, will also support domestic gold prices.

Similarly, Hitesh Jain, lead analyst, Institutional Equities, YES Securities says that rising inflationary trends should be conducive for gold, implying investment demand for the yellow metal will likely increase in the coming months. Despite the rising inflationary trend, the Fed is not keen on normalising monetary policy for quite some time, citing inflation as a transient phenomenon. As a result, we will likely live with a weak dollar and ring fenced US 10-year yields, yet another narrative of negative real yields that will work for gold. We see a chance of gold prices getting proximal to the US$1,900/oz mark in the next 2-3 months,” he says.

Gold prices have consolidated over the last few months and recently caught up some momentum. A commodity report by Motilal Oswal Financial Services recommends buying gold for a short to medium perspective targeting new lifetime highs towards $2,050 followed by $2,200. “On the domestic front, the post-Budget prices correction is a good level to enter once again for immediate targets towards Rs 50,000 and eventually hitting new highs of Rs 56,500 and above over the next 12-15 months,” it notes.

Smart options to buy gold
Sovereign Gold Bonds are a better way of investing in the metal as they pay annual interest and are tax-efficient. However, they suffer from low secondary market liquidity resulting in price inefficiencies. The tenor of the bond is eight years and the buyer will have an exit option from the fifth year which can be exercised on the interest payment days.

Gold ETFs sold by asset management companies are backed by 24 karats physical gold and are traded on the exchanges at the prevailing market price of physical gold with no making charges denting into investor returns. An investor can sell gold ETFs at any point of time.

While digital gold scores well on purity and liquidity, it falls short on regulation and price efficiency due to high premiums and bid-ask spreads. So, on this Akshaya Tritiya or Akha Teej make a smart choice of buying gold to maximise your wealth in the long term.