Akshaya Tritiya 2018: Which one is better investment Gold ETFs or physical gold
The savings dynamic is beginning to change with investors also considering other than physical gold options such as gold exchange traded funds, gold fund of funds and sovereign gold bonds.
Akshaya Tritiya which is considered as one of the most auspicious day in India to buy gold will be celebrated on April 18 in Maharashtra. During this period, demand for gold particularly physical gold in the form of jewellery, bars and coins usually witness rise. However, traditionally investors in India typically purchased gold in physical form, which along with real estate forms a big portion of country’s household savings. Although one tends to forget a list of additional cost (for example storage cost) that is latched while purchasing physical gold from investment perspective.
Not only this, buying a physical gold comes with a lot of risk factors, which a customer should keep in mind during purchase of the metal in this auspicious occasion.
Dhaval Kapadia, Director, Portfolio strategist, Morningstar Investment Adviser (I) said, “Investment in gold as an asset class acts as a hedge to geo-political uncertainty, store of value or inflation hedge, and benefits in case of rupee depreciation. Gold is also considered as a safe-haven asset and demand for it increases as and when market participants are in a risk-off mode, while it decreases when they are in a risk-on mode (indicated by volatility in financial markets).”
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Recently, gold saw increased demand as its safe-haven appeal rose on the back of an increase in geo-political risk i.e. US airstrikes, elections in France and Germany, and ongoing tensions with North Korea.
Kapadia further explains that, domestic gold prices mainly track international gold prices. Historically, international gold prices have generally shared an inverse relation with US dollar (since it’s denominated in that currency, its price should move down when the USD appreciates and vice-versa) and US Federal Reserve fund rate.
“If interest rates move up it becomes unattractive to hold gold, since it doesn’t generate any income unlike debt instruments and vice-versa,” said Kapadia.
Also considering jewellers usually see massive rise in demand for yellow metal on this day every year either in the form of jewellery or coins – there are chances that you may be misled with what you have purchased.
For purchasing physical gold – a customer must keep in check factors like purity of gold, making charges, man-made versus machine made ornaments, buyback options, jewellery stores and mark of Bureau of Indian Standards
Interestingly, according to Kapadia, this savings dynamic is beginning to change with investors also considering other than physical gold options such as gold exchange traded funds, gold fund of funds and sovereign gold bonds.
Allocation to gold could be more strategic in nature i.e. around 5-10% of the total portfolio, given historically gold share negative correlation with equities, ultimately providing diversification benefit.
From an investment perspective Gold ETFs can be preferred to physical gold. The underlying asset of all the Gold ETFs is gold of 99.5% purity, thus the performance of most of the ETFs is quite similar.
The minor difference in their performance is on account of tracking error (difference between ETF’s returns and gold’s returns) and expense ratio.
Gold ETFs are easy to hold as they are in a dematerialized form. This helps in saving on the storage cost and avoid security risk. Also, their pricing is transparent and are more liquid as they are listed on the exchange and their purity is guaranteed by the asset management company.
Therefore, it is advisable that this Akshaya Tritiya, choose your yellow and shiny metal wisely, or else if you do not want to go through all the hassle, well one can definitely opt for Gold ETF – as they involve less risk.