Does it makes sense to buy gold this Dussehra at such elevated prices?

India’s love for gold is well-known. The precious metal has a central role in the country’s culture, a fundamental part of many rituals, considered to be a store of value, passed on from generations, and symbolic of Goddess Lakshmi, a mark of wealth.

However, this year, elevated prices of gold amidst the COVID-19 crisis, have kept India’s gold demand muted - even during the festive season. People are focusing on essentials, conserving cash, and pushing back discretionary spending.

Demand for jewellery is down 74 percent on a YoY basis to 44 tonnes(t) – the lowest quarterly, according to the data released by the World Gold Council (WGC). Likewise, the demand in H1 2020 was down 60 percent to an all-time low for our series of 117.8 t.

Usually, the second half of the calendar year reports an increase in gold demand with the onset of the festive season. But this calendar, the WGC does not expect any significant improvement in demand in six months to December 2020.

While normal or above-normal rainfall bodes well for gold demand from rural India (which contributes around two-thirds of the country’s gold demand), this year excess and large excess rainfall with high intensity in many parts of the country, caused inundation and damaged crops which would have a bearing on rural income and India’s gold demand.

That being said, here are compelling reasons to approach gold as an investment avenue; a portfolio diversifier:

• COVID-19 cases are failing to recede and there is a second wave of coronavirus.
• GDP growth has contracted sharply in advanced economies and emerging economies.
• A virus-led global recession looks inevitable ---probably worse than the Global Financial Crisis of 2008 as pointed out by the IMF. The IMF has observed that the COVID-19 crisis is like no other.
• Consumption is muted in many parts of the world posing a challenge to reinvigorate growth.
• The central banks across the world are reducing interest rate and keeping monetary policy stance accommodative to support growth.
• The global debt-to-GDP is at a record high, nearly US$ 258 trillion (over 331% of global GDP) as per the Institute of International Finance. This is because most economies are relying on sovereign debt, particularly when their economic growth rate has shrunk sharply amidst the pandemic.
• Geopolitical tensions are escalating with every country blustering nationalism and protecting its political and economic interest––the US, UK, China, India, Pakistan, South Korea, North Korea, discontent in Latin America, and even countries in the MENA (the Middle East and North African) regions.
• Trade war tensions exist due to protectionist policies followed by many nations.
• There is a potential risk to the inflation trajectory (mainly on account of food).
• The US Presidential elections are in November 2020.

• And the stock market volatility has increased.

Recognising that the aforesaid factors will keep the spotlights on gold, smart investors -- across the globe -- are tactically allocating to gold via Gold Exchange Traded Funds (ETFs).

The WGC data reveals that even central banks across the world recognising the aforesaid factor aren’t taking any chance---they are maintaining healthy gold reserves amidst times when global uncertainty has heightened.

With gold prices having reported a noticeable Rs 6,000 intermediate correction since August (after crossing well over Rs 55,000 per 10 grams), this is potentially an opportune time to buy gold from an investment standpoint.

Vijayadashami or Dussehra is one of the auspicious muhurats to invest in gold. Dussehra is celebrated to commemorate the triumph of good over the bad.

If you invest in gold now, it would probably help your investment portfolio overcome the challenges in play in the journey of wealth creation. But invest in gold the smart way -- through Gold Exchange Traded Funds and/or Gold Saving Funds.

1) Gold Exchange Traded Funds (Gold ETFs) – Gold ETFs are open-ended exchange-traded funds (offered by mutual funds) which track the price of gold, and each unit represents ownership of the gold asset.

Each unit of gold in the gold ETF that you, the investor, buys is equal to 1 gram of gold (some mutual fund houses also offer 1 unit at 0.5 gram of gold).

The investment objective is to generate returns broadly in line with the performance of gold (the domestic price of gold).  You can purchase units of gold ETF on the recognised stock exchange; a demat account and share trading account is necessary.

Do note that on the exchange, the units can be purchased/sold in a minimum lot of 1 unit and multiples thereof. When you buy gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment.

The gold is held on your behalf by an appointed custodian for the ETF. Notably, you will not get to see or receive delivery of the gold you own.

The tax implications when you sell physical gold and Gold ETFs are the same. Selling gold ETF units attracts capital gain tax. And in times of need, the units can be used as collaterals for loans.

2) Gold Saving Funds – This is an open-ended Fund of Fund scheme (offered by mutual fund houses) investing its corpus into an underlying Gold ETF, which benchmarks the performance against prices of physical gold.

Thus, the investment objective is to generate returns that closely correspond to returns generated by the underlying Gold ETF.

The application for purchase needs to be made to the respective mutual fund house, a demat account is not necessary. The units allotted reflect in your mutual fund account statement. The units are purchased/sold at the NAV declared by the mutual fund house.

Investment in a Gold Savings Fund can be done lump sum or through SIP (Systematic Investment Plan), whichever way is convenient for you.

The minimum investment amount to invest in a Gold Savings Fund is Rs 5,000; for additional purchase, the minimum amount usually is Rs 100; while the minimum SIP amount required is Rs 1,000 (with minimum 36 installments).

Speaking of the tax treatment, in the case of Gold Savings Fund and gold ETF is the same. Selling units of a Gold Savings Fund attracts capital gain tax.

To invest in gold regularly, systematically and in a disciplined manner, taking the SIP route with a Gold Savings Fund would prove sensible -- as it can help compound wealth with the benefit of rupee cost averaging.

SIPs in Gold savings Fund as a category has delivered a 23.7% return over a 3-year period and 16.3% return over a 5-year period, reveals the data sourced from Value Research as of September 24, 2020.

Holding gold as an investment will potentially accrue the following benefits:

1) Act as an effective diversifier (as the precious yellow metal usually shares negative correlation with other assets viz. as equity, debt, real estate, etc.)
2) Help deal with systemic risk, during stressful, uncertain times (as we are witnessing at present)
3) Potential to y generate good risk-adjusted returns over the long-term
4) Serve as an effective portfolio diversifier

5) And be highly liquid

Since September last year, gold in the Indian rupee term has generated +31% absolute returns, higher than nearly 24% clocked in the calendar year 2019.

Graph 2: Gold displays its luster in the long run

The long-term secular uptrend exhibited by gold is something that invites attention and highlights the importance of owning gold in the portfolio with a longer investment horizon.

A point to note is: unlike financial assets, gold is a real asset. This means, gold does not carry credit or counterparty risk and usually supported by high inflation. This is why gold has demonstrated its appeal and fared well over the long-term.

Going forward too, gold is expected to display its lustre, play the role of an effective portfolio diversifier, a hedge (when other asset classes fail to post alluring returns), a safe haven, and command a store of value ---particularly when the world is staring at economic uncertainty caused by the pandemic and geopolitical tensions are escalating.

It makes good sense to tactically invest in gold this Dussehra and be a smart investor. Based on your risk profile, consider allocating around 10% to 15% of your entire investment portfolio in gold with a long-term view (whereby short-term price fluctuations can be mitigated).

Wish you all a Very Happy Dussehra!

Happy Investing!

(Jimmy Patel – MD & CEO, Quantum AMC, Quantum Mutual Fund)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.