Dubai: There has been an undeniable growth in gold prices over the past few decades, which is why there never ceases to be any significant dip in demand when it comes to amassing one’s wealth in gold.
Historically, although high gold prices can dent consumer demand, whenever a festive season nears, gold purchases most often picks up, as it has been the trend for the past several decades.
For buyers, who are short on cash, funding is not a problem as banks are already offering loans to those who are willing to buy gold or gold jewellery with borrowed money.
The upswing in gold prices over the last few months, that too in a downturn, has kept investors excited about its prospects and many of them won’t mind investing in the yellow metal even by taking a loan.
Given the current high prices of gold, it is not advisable to invest in gold with borrowed money at current prices
Moreover, investing in gold is a good back-up plan, not just as an investment, but also as a means for raising a quick loan in an emergency.
Gold a good bet – but worth on borrowed funds?
So, while investing in gold is always supposed to be a good bet, does it make sense to buy gold by taking a loan or buying it on borrowed funds in the first place?
“Given the current high prices in gold with prices trading at around $1,700 (Dh6,244) per ounce, $54.59 (Dh200) per gram and $54,590.70 (Dh200,511) per kilo, it is not advisable to invest in gold with borrowed money at current prices,” cautioned Georgina Effel, a gold investor-turned-analyst based in the UAE.
But does this mean that when the cost of the yellow metal gets much more affordable, it’s comparatively more prudent to buy gold with your credit card or by taking a loan specific for this purpose?
“Even if gold prices drop, it is not an advisable idea to borrow money to invest in gold. Though sometimes it can provide the extraordinary returns, yet these returns do not justify the risk involved,” Effel added.
“The high interest cost makes this idea unattractive and buying gold on margin in a volatile market is a quick way to get your net profits wiped out. The first erratic price movement might destroy your entire investment.”
If I were to buy gold on borrowed money, how do I do it?
Let’s say you’ve decided to buy gold on borrowed money, how would you go about it? Would you opt for a credit card or a personal loan? Which is a more convenient or cost-effective option? Are there any other means?
The reason some people use a personal loan to buy gold is that when interest rates are low and the price of gold is going up quickly, the price of gold could increase at a higher rate than the amount you’ll pay in interest on loans.
However, this isn’t a good investment strategy for all. Not everyone will be able to qualify for a personal loan at an interest rate that’s low enough to ensure they come out ahead after factoring in the increase in value of gold.
“There is plenty of risk in buying gold on loan. If the price of gold goes down, then you might not end up making money. Therefore, it wouldn’t be a good investment for anyone who can’t afford to lose part of their investment,” explained Shino Thoma, an India-based banker, who specialises in checking whether people qualify for gold loans.
There is plenty of risk in buying gold on loan. If the price of gold goes down, then you might not end up making money
“So, before you invest, remember the gold market is highly unpredictable, making short-term holding extremely risky. Hence, only use a loan to finance your gold purchase if you’re planning on holding them for a long time.”
Would you make money borrowing to invest in gold?
With current interest rates, would you make money borrowing to invest in gold? Gold returns can vary greatly depending on the period. For example, in the past year, gold has increased in price by more than 29 per cent.
That might make you want to rush out and buy gold, but you should know that in the past ten years, gold has increased in price by only 16.76 per cent, which works out to an annual return of 1.56 per cent, which is less than the amount you would have likely paid to borrow money over those ten years.
“Using a personal loan or any other means to borrow funds to buy gold is a risky investment, and you should consider whether it’s a good idea given the market before making any decisions,” added Thoma.
“But even if you are a sophisticated investor and think you can predict when the price of gold or silver is set to skyrocket, you may be wrong and end up losing money.”
Gold had climbed to a high of $2,043.30 (Dh7,505) per ounce on March 8, a rise of 13.5 per cent from the $1,800 (Dh6,611) level seen at the start of the year, as the Russia-Ukraine conflict escalated, and as the world’s largest economy, the US, hiked interest rates three times so far in 2022 – with two more rate hikes seen this year.
These expectations have the potential to limit the upside for the gold market soon. “A recession would be supportive to gold prices, but the sharp increase in interest rates being used to tackle inflation has so far been limiting the upside for the precious metal,” evaluated Effel.
“Considering that the price of gold is expected to stay range bound for the rest of the year, buying gold on borrowed funds would imply the cost of the loan to eat into any future profit you make on the metal.”
Gold traditionally has been seen as stable investments that are particularly suited for times of financial uncertainty. The adage goes that when the stock market or economy is in turmoil, investors put their money in commodities like gold.
But if you are wondering if using a borrowed money to buy gold is a good investment strategy, the logic is straight-forward.
If you can get a loan with a rate lower than you expect your return on investment to be, then this may be a good idea, but there are the above-mentioned factors to consider, as well.
It does make sense to invest in gold from an investment diversification perspective, buying on dips
However, if you are still keen on investing in the yellow metal, then it is advisable to do so at dips. Overall, gold has given an annualised return between 16 per cent and 18 per cent over the past 10 years.
So, it does make sense to invest in gold from an investment diversification perspective, buying on dips, Effel further advised.
“But remember to invest your own money, and not borrowed money whose interest rate usually varies from 14 per cent to 30 per cent. And even if you are investing your own money, it is better to wait for a fall in gold prices.”