How gold investment is safe & secure for long-term investment

The price of gold is at an all-time rise. The lacklustre global economy and the world ravaged by the ongoing pandemic has shrunk the supply of physical gold. As a result, the price of gold is only going to go higher in the coming months.

The whole world, especially the developed economies are going through turbulent times. Many people in the United States of America have lost their jobs and sources of income during the pandemic. Added to that the country’s GDP has been falling for quite some time now and that is a pattern that seems to be reflected all around the world. In such an uncertain period of time, the one asset that promises returns and the asset that most people will want to put their money in is gold.

Investors across the world are shifting their investments from risky assets like stocks to more risk-free assets like gold, silver, and government bonds. But a lot of people wonder whether uncertainties of the world guarantee a safe long-term investment option in the form of gold and what is the correct way to invest in the yellow metal in the current circumstances? Will they get their money’s worth when selling old gold jewellery in the future?

Let us try to find the answers to these questions.

Should one invest in Gold?

If you plan to invest for a long term and the purpose of your investment is to accumulate wealth for the future, the present cost and the small highs and lows in the price of gold should not make you waver from your decisions. Reliable researches conducted by Oxford Economics suggest that gold is that one asset that will continue to do well even during deflation. Deflation is the time period when interest rates become low and consumption decreases, causing the economy to undergo financial stress. Even past instances like the global economic crisis of 2008 saw gold performing well. The current economic situation due to COVID-19 seems bleaker than before as nothing has remained immune to the onslaught of the Coronavirus led crisis.

Gold is negatively linked to equities. Global rating agencies, as well as the International Monetary Fund (IMF), has projected low global GDP. This will have a negative impact on the equities forcing their portfolio institutional investors to shift their finances from equities to gold as well as bonds. However, the hike in the yield of bonds because of the liquidity issues in the bond market will prod the investors towards gold.

All these factors combined show that there will be an increase in the demand for gold in the future.

Is long-term investment in gold lucrative?

Gold has been giving high average returns of 14.10 percent since 1973 as per the World Gold Council Report issued in March 2020. Furthermore, the gold mines across the world were shut temporarily due to the pandemic which will only have a positive influence on the prices of gold keeping in mind the phenomenon of low supply leads to high demand which further leads to increased prices. 

While in 2019 where there was still no impact of COVID-19, gold gave a return of 25 percent. In 2020 thus far, gold has already given 16 percent in return. With the brutal onslaught of the Coronavirus spreading the equity is under grave pressure that will only increase in the coming days. This will result in driving the prices of gold higher.

Hence, it is not difficult to conclude that the price of gold is only going to move upwards in the future and therefore, there is no better time to invest in gold for the long term.

Different ways to Invest in Gold:

Traditionally, gold has been worn as jewellery. Gold is used to adorn both men and women. Apart from that selling old gold jewellery has been a tool of getting through emergencies around the world as opposed to getting a personal loan. It has thus been a source of financial support for most people.

There are two ways you can own gold. You can buy it physically as jewellery, as coins or as gold bars. Physical gold can be bought at any trusted jeweller’s shop. Some jewellers even sell online. Even some e-commerce websites sell gold coins that can be delivered to your doorstep.

On the other hand, there is paper gold that is available either as gold Exchange Traded Funds (ETFs) or as Sovereign Gold bonds (SGBs). Apart from this, there are gold mutual funds which in turn invest in the Exchange Traded Funds. These gold mutual funds also invest further in shares of gold mining companies internationally.

Physical Gold:

Jewellery- Possessing gold is a marker of luxury across UAE especially as jewellery. The gold in the form of jewellery has its own concerns associated with it in terms of safety as well as the “making charges.” These making charges make the already costly gold more costly. These charges on jewellery range somewhere between 6 percent to 14 percent of the gold cost and can even go as high as 25 percent. The disadvantage of these making charges is that it cannot be recovered when you go selling old gold jewellery. However, having gold jewellery comes to the rescue in the times of financial crisis as selling old gold jewellery will offer instant cash returns. The only other option in such cases is to get a personal loan.

Gold Coins- These coins can be bought from any jeweller, banks as well as non- banking financial institutions. You can buy varying wights of these gold coins for instance, 1 oz or � oz etc.

DMCC in 2012 launched the “UAE GOLD BULLION COINS” in order to celebrate the UAE as a hub of gold trade. These coins are minted by the Emirates Gold DMCC, Dubai Refinery, an accredited member of the DMCC’s DGD or Dubai Good Delivery standard. The DGD standard is an international benchmark of gold quality and technical specifications was released in 2005. This can be a good option for long-term gold investment and can be used in future just like selling old gold jewellery.

Gold Savings Account- One can start a gold saving account for as little as AED 500 per month. You can deposit your funds as cash deposits in the bank, through online payment transfer or through standing payment instructions from the bank. You can use your gold saving account to buy gold or any other precious metals from one of the secure online platforms. The amount of gold you can buy depends on the spot market rate. The gold saving membership plan will enable you to redeem the physical gold coins or bars for small as well as large denominations just like selling old gold jewellery.

Paper Gold:

Gold Exchange Traded Funds (ETFs)- This cost-effective way of owning paper gold is through gold exchange traded funds (Gold ETFs). These are bought and sold on a stock exchange with gold as an underlying asset. Unlike losing out on your initial making charges when selling old gold jewellery, these ETF are low in cost. Even the prices are transparent that make these ETFs more advantageous. They are bought at the same price as the actual price of gold and thus gold is the benchmark of ETFs. You can buy these in lump sum or through the systematic investment plans (SIPs).

Sovereign Gold Bonds (SGBs)- This is another effective way of owning paper gold. These are government securities that are dominated by the yellow metal. These are however not available for sale at all times. The government intermittently opens up a fresh window every two to three months for the sale of Sovereign Gold Bonds to the investors.

The government of UAE has fixed the rate of interest charged on SGB schemes. The annual interest rate of SGBs is 2.5 percent that is given to the investor every 6 months depending on the initial value of their investment. This rate is subject to change on the basis of the current government policies. One person can buy a minimum of 2 grams of gold and the maximum quantity of gold allowed to be bought in one financial year is 500 grams.

The maturity period of SGBs is 8 years but they can be redeemed or withdrawn after a period of 5 years from the date of issue. But this withdrawal will be counted as a premature withdrawal. Getting SGBs is safe but they can not be cashed-in during emergencies like with selling old gold jewellery. Your only other option in such a case is to get a personal loan.

What is the better choice?

SGBs and Gold ETFs are more cost-effective than physical gold like jewellery or coins. The reason behind this is that there is no entry cost for paper gold. The initial cost of owning any kind of physical gold is approximately 10 percent while this cost is only 1 percent for the latter. They also don’t have the added risk of theft associated with them as is the case with physical gold.

SGBs are better suited for those who want to invest in gold for longer durations as their maturity is only after 8 years. They however have a lock-in period which means you cannot redeem them in case of a crisis unlike selling old gold jewellery. In an emergency, the only other option is to get a personal loan. Gold ETF on the other hand have higher liquidity. They can also be easily bought online unlike SGBs.

From the taxation point of view SGBs are tax exempt but the gains from Gold ETFs are subject to 20 percent tax after 3 years post indexation.

The Bottom Line

Gold has been bought for investment purposes all over the world. Earlier however they were not thought to be a secure option due to the risk of getting stolen. It was too much to worry about. But with the new option of paper gold you can easily own gold without having to worry about keeping it secure. What’s more? You can do all this from the comfort of your home by managing your investments online.