UAE: Should I buy physical gold or invest in gold-tracked bonds, stocks or funds instead?
Apart from buying physical gold, investors have options like gold bond, ETF or mutual fund
Dubai: Gold investment is a traditional form of investment and has always been considered as one of the lowest-risk investment options in the world today.
The yellow metal has historically served as a hedge against inflation, so the investment can help in averting risk of loss, beat inflation and provide a good amount of security during uncertain times.
Also, gold is one of the most exported metals worldwide and wealth planners suggest that the metal should be a part of an investor’s portfolio.
Gold preferred over traditional investments
In long-term perspective, investment in gold gives a better return than any traditional form of investment options like fixed deposits (FDs) or recurring deposits (RDs).
There are multiple options available to invest in gold. Apart from buying physical gold, investors have options like gold bonds and exchange-traded funds (ETFs) or mutual funds.
Gold ETFs are funds that are traded on bourses or exchanges just like any company’s stock. When an investor purchases one unit or more, it appears into his or her account.
Also, gold ETF investments are comparatively easier to invest and there is no ‘carry cost’ (cost of holding a physical commodity over time). Moreover, there is no risk of impurity either.
Investment in non-physical gold is gaining popularity
Investment in non-physical gold has been gaining popularity, more so in recent times. Here, investors are not required to pay labour charge.
When investors buy physical gold, they have to pay the labour charge and also bear the risk of storage. Therefore, investing in bonds and ETFs are cheaper and offer more return that possessing physical gold.
Physical gold, however, is still most popular form of investment because it has aspects of luxury and fashion. Gold bonds or ETFs, however, do not offer these.
Risks of holding onto physical gold
The biggest risk is that someone can physically take the gold from you, if you don’t keep your holdings protected.
The second-biggest risk occurs if you need to sell your gold. It can be difficult to receive the full market value for your holdings, especially if they’re coins and you need the money quickly.
So you may have to settle for selling your holdings for much less than they might otherwise command on the international market.
How about buying stocks that mine gold?
Another way to take advantage of rising gold prices is to own shares in the miners who produce gold.
In some ways this may be the best alternative for investors, because they can profit in more than one way on gold.
First, if gold rises, the miner’s profits rise, too. Second, the miner has the ability to raise production over time, giving a double whammy effect.
So you get two ways to win, and that’s better than relying on the rising price of gold alone to buoy your investment.
Risks of investing in gold-related mining firms
If you’re investing in individual stocks, you’ll need to understand the business carefully. There are a number of risky miners out there, so you’ll want to be careful about selecting a proven firm in the industry.
For example, it’s best to avoid small miners and those that don’t yet have a producing mine. Finally, like all stocks, mining stocks can have volatile prices.
Diversify this risk by investing in ETFs that own mining stocks
Don’t want to dig much into individual gold companies? Then buying an ETF could make a lot of sense.
Gold miner ETFs will give you exposure to the biggest gold miners in the market. Since these funds are diversified across this sector, you won’t be hurt much from the underperformance of any single miner.
However, while the diversified ETF protects you against any one company doing poorly, it won’t protect you against something that affects the whole industry, such as sustained low gold prices.
And be careful when you’re selecting your fund: not all funds are created equal. Some funds have established miners, while others have junior miners, which are more risky.
What about putting your money in gold funds?
These are simply mutual funds that invest primarily in gold ETFs. So it’s a way of taking exposure to gold ETFs without buying them directly. But it carries an extra layer of costs towards management fees that reduces returns a bit when compared to gold ETFs.
Gold mutual funds are open-ended investments (offered through a fund company that sells shares directly to investors, as opposed to a closed-ended fund which offers a fixed number of shares) and ideal for investors who want to lower the risk of investment. Also, it can be liquidated easily.
Gold ETFs or funds make it easy for investors to buy gold at low cost, without having to hold physical gold and without incurring wastage associated with physical gold.
They are well regulated (unlike digital gold) and are also convenient to do small investments - through SIPs or Systematic Investment Plans (monthly or periodically planned investments).
However, the biggest risk of investing in digital gold is that there is no regulator for the product. Also, digital gold providers charge a fee ranging between 2-3 per cent of your investment, which provides for the expenses such as cost of storage, insurance and trustee fee, which eats into your investment amount
Gold bonds or ETFs - which is better?
Investment advisors list out a few pointers to pick between gold bonds and ETFs:
If you are planning to use gold as a tactical part of the portfolio that you will regularly buy and sell, then you need to value liquidity more. And hence, investing in gold ETF is better than gold bonds.
If you plan to hold a large amount in gold for the short-term, then having it in gold bonds will mean that you will need large volumes on exchanges to exit your investment positions. But that is not feasible currently due to poor volumes of various gold bond series on stock exchanges.
But if you are investing for the long term and are sure that you won’t need to exit before 8 years or so, then gold bonds may be a better option.
Why not hold a combination of gold-tracked investments?
Investors can hold a combination of gold bonds and gold ETFs. You can purchase such bonds occasionally when new series are announced and you have funds available to invest. This can be augmented by purchasing gold ETFs when there are temporary short-term price corrections in gold.
If you want to accumulate gold regularly, then do a SIP in gold ETFs every month, experts recommend.
The gold bonds are best suited for those who have a longer investment horizon, as these gold bonds come with a long tenure. Moreover, having some exposure to gold (ranging from 5-15 per cent) of your long-term investment portfolio is advisable.
Key takeaways
Physical gold has been a preferred investment instrument among many, but it is slowly changing now. Investors are also looking at other options like bonds and ETFs.
While gold bonds are a low-risk investment and pay a fixed interest rate per annum, one of the advantages of gold ETFs is the transparency in pricing. Investors can use both gold bonds and gold ETFs for long-term investments.