To answer these questions, we have to first understand the primary driver of value of physical gold. Historically, its value has been primarily driven by its unparalleled appeal as the most widely used ornamental metal. Moreover, this scarce yellow metal has traditionally been a favourite vehicle of investors to preserve wealth for many centuries because it has worked very well as a hedge against inflation. These qualities of physical gold also made gold the most trusted part of government treasuries as a security against economic uncertainties over many centuries. And its attractiveness has not come down till date.
Unmatched liquidity around the world
The popularity of the yellow metal can be gauged from the fact that even in the physical form, it enjoys unmatched liquidity in any corner of the world. “One must not forget that a bank lends money against gold jewellery and not against diamonds. So the yellow metal will keep shining as long as there are women in this world and there is passion for gold,” says Surendra Mehta, National Secretary, India Bullion and Jewellers Association Ltd (IBJA).
Apart from investment value, the yellow metal also has a lot of emotional value. “Gold is the only commodity which can be held as an investment and can also be flaunted,” says Mehta.
Several cultures have descriptions showing possession and display of physical gold as a matter of self-esteem; this cannot be expected from digital gold.
A reliable security during uncertainties
Physical gold has for ages proven its role as being the most dependable primary security during unforeseen events. Being a highly portable wealth in uncertain times has added more credence to its role as a vehicle of emergency wealth. “Physical gold actually can be encashed at any point of time. During disasters like Covid, we saw people going back to their villages leaving everything behind except gold. This gold helped them to survive the bad times,” says Mehta. If you hold physical gold in the bullion form, there will hardly be any erosion of value due to making charges. Moreover, it is very convenient to convert bullion gold into jewellery when required. “Physical gold can be converted to jewellery at any point in time and I feel the best time to convert gold into jewellery is during a marriage or a festival or during a celebration,” says Mehta.
Should locker charges and insurance cost be deterrents?
Safety is often made to be a big drawback of physical gold. One can always use a bank locker or have a home insurance that covers gold jewellery to ensure the safekeeping of the precious metal. However these come at a cost. So the question is whether charges such as bank locker and the premium of home insurance are too high a cost to pay for physical gold? Aren’t these costs worth the risk mitigation they offer?
Even other forms of gold have some or other kind of costs associated with them. Harshad Chetanwala, founder of Mumbai-based wealth management firm My Wealth Growth, says the issue is not with the charges as there is also a cost of storage when it comes to digital gold, like expense ratios in the case of gold ETFs or gold savings funds. “It is about the hassles of storing physical gold. A lot depends on the comfort of the investors as many investors believe in physical gold because it offers the touch and feel of gold which does not exist in the digital format of gold,” he says.
There are many occasions when physical gold is unavoidable. “If you have to keep your near ones and dear ones happy, yellow metal gold is the best option,” says Mehta. “They don’t remain happy with digital gold or virtual gold. Hence, the cost of locker rent and insurance premium hardly matters.”
Chetanwala, says, “Physical gold can be handy from a liquidity perspective as it can be liquidated in case of an emergency. A lot depends on the shape and form of the physical gold, and there is a possibility of the jeweller deducting some charges in case of physical gold. Having said that, digital gold also offers similar liquidity. It can be sold on the exchange or redeemed and the money gets credited to your bank account, depending on the instrument,” he says.
When to go for physical gold and how much?
It is not advisable to have your entire gold investment in physical gold. Similarly, it will be impractical to have the entire gold investment in virtual gold. It will be better to have a good balance between the two forms of investments.
Most experts advise keeping gold investment under check. “Financial pundits advise that an ideal portfolio of investments could include 10-15% in gold,” says Jaydeep N Banerjee, Co-Founder, Dvara SmartGold Pvt Ltd.
What part of it should go towards physical gold will vary according to the needs of the individual. Chetanwala says investing in gold is important from a diversification point. “Those who wish to diversify their portfolio in gold can consider investing in the physical or digital form depending on their comfort.”
Best form to invest in physical gold
Even in the physical form, it would be better to avoid investing all the money in jewellery. “Investing in jewellery format can be avoided as much as possible. One does invest to liquidate it at some stage, like when the objective has been achieved or in case of an emergency. Any form of jewellery can attract making charges or other forms of deduction when one sells that jewellery,” says Chetanwala.
The amount you wish to invest in physical gold for future use as jewellery can be invested into coins or other forms of bullion gold. “My personal view is to buy gold in bullion or coin form in SIP and convert the same into jewellery as and when required,” says Mehta.
As far as investing in jewellery is concerned, it should be done according to the usage. Banerjee explains that jewellery is a social and emotional purchase and it should be restricted to occasions like marriages or religious rituals that involve gifting and exchange of ornaments. “The proportion of jewellery to other forms of gold is left to an individual’s preference because, beyond the emotional appeal and social status, it is not recommended as an investment,” he says.
There is another way to make the best of digital and physical gold. You can initially invest in digital gold through SIPs then convert your investment into the desired quantum of physical gold. “At the heart of the matter is access and availability. Even for customers who prefer physical gold either as an adornment or for financial security, digital gold offers instant, easy and preferred access. Digital gold allows customers to consider flexible savings, including micro-savings, as per the availability of resources,” adds Banerjee.
When it comes to the best form of investment into virtual gold, Sovereign Gold Bonds (SGBs) score above most in terms of returns. “Ideally, sovereign gold bonds are one of the best ways to invest in gold, but it is digital in nature. Many investors buy gold coins every month to accumulate gold. They are more comfortable selling these coins as and when they need to liquidate them,” adds Chetanwala.
SGB with a combination of digital and physical gold may work well as your gold portfolio.
