The sharp decline in the price of gold since last October has made many nervous. After all, many households have sizeable proportion of their savings in the yellow metal.
That the analysts expect a further decline in the price only intensifies everyone’s concern.
The question that many of you face is this: Should you stop buying gold? Better yet, should you sell your existing holdings and buy at lower levels? In this article, we discuss why you need not be concerned about how the gold price moves. You should instead set-up a systematic investment to continually buy the yellow metal at all price levels!
Gold is not an investment that you would like to sell at a higher price, just as you would do with stocks and bonds. The reason is simple. You invest in stocks and bonds with a purpose of accumulating wealth to meet expenditure (child’s college tuition fees) at a later date or to buy an asset (home). On the other hand, you buy gold today to consume it in the future- to make ornaments to gift to your daughters or sons on their marriage, for instance.
You could alternatively invest in stocks and bonds and accumulate wealth in an investment portfolio to buy gold at a later date. But what if gold prices move up more than your stock-bond portfolio? You may not be able to buy as much gold as you wanted with your investment portfolio.
You can instead buy gold ETFs and sell them at the market price whenever you need the money to buy gold ornaments. This is because financial gold tracks the price of the physical gold. Buying gold, thus, hedges your future gold consumption requirement.
Then, consider the fact that gold offers some protection to your investment portfolio during global crisis. This is because of the “flight to quality”- when the world economy faces a crisis, money flows into gold, thus, pushing up its prices.
Behavioural Reasons
There are also two behavioural reasons why you should consider buying gold. One, gold has been the traditional form of savings among Indian households for many years. So, you need not be as nervous about fluctuations in gold prices as you would be when stock or bond prices move.
Buying gold gives you a feeling of comfort! Psychologists call this the “exposure effect”. It refers to the fact that you are comfortable with the experiences you are familiar with. This factor can also be attributed to the flight to quality- that gold is accepted at all times gives you the comfort and the feeling that it is a “safe” asset.
And two, gold is a real asset. And real assets possess an important characteristic- you can touch and feel them. The touch-and-feel factor is one reason why many prefer to buy physical gold than financial gold. We, however, prefer financial gold over physical gold for two reasons.
First, financial gold is more liquid than physical gold; you cannot sell your physical gold without incurring substantial transaction cost. And second, financial gold has lower storage costs. You have to find a secure place to store your physical gold. And it is difficult to get a bank safe-locker than it is to buy gold! Whereas the yearly charges on financial gold is nominal.
Conclusion
Your objective should to be to buy gold on a continual basis. This is because your gold consumption is continual- you may, for instance, choose to gift gold to your family during several festive occasions. Given the continual need for gold, you should not be concerned about the changes in its price levels. Instead, you should set-up a systematic plan on gold ETF. Your investment should preferably be 10 per cent or less of your total portfolio value.
(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to >knowledge@thehindu.co.in )