Many contend that gold has lost its shine. After making life-time highs of sub $1900 per oz., it is now trading almost 30% lower at nearly $1330 per oz. A question then that often crops up in the financial world is whether we still need to invest in gold. If so, how and where do we buy it? Gold has always been a traditional object or instrument of investment, especially in the Indian sub-continent and therefore, no one can really stay away from it.

Gold reminds me of the following quote made by Warren Buffet: ‘Gold gets dug out of the ground in Africa, or some other place. Then we melt it down, dig another hole, bury it again, and pay people to guard it. It has no utility. Anyone watching from Mars would be scratching their heads.’ I am pretty sure that the elders of our household, who I assume would have 20%-30% of their net worth in the form of gold at any given point in time, would perceive such a statement with anger or would probably be amused by it.

Let me first apprise you of the price of gold in Indian markets. The prices naturally, are governed by the laws of demand and supply, but does this hold true for gold as well? We do not produce or mine enough gold. Hence, to meet our domestic requirements, gold  needs to be imported. When we import gold, we have to pay for it in US Dollars. It pressurizes the economy as the dollars move out while purchasing this gold. Well, one may very well argue that dollar amounts move out for other purposes as well. However, what real industrial utility does gold have? Gold in fact has very limited industrial utility. Most of it goes into bank lockers or into some form of ornaments. Hence, economists state that the money invested in gold, in the real sense is blocked. If this money rolls into the system, it would be much better for the economy.

Having said this, the question still remains whether one must invest in gold. If so, how and where do I buy it? The best way to do this is to buy an ETF (Exchange Traded Funds). ETF is the best and simplest way to invest in gold in the long run. An ETF is like a share, listed on the stock exchange and can be bought and sold like a stock. One unit of ETF is roughly equal to the price of 1 gm of gold. There are 5-6 gold ETFs listed on the exchange, with good liquidity. Your broker will be able to assist you further with this.

How you buy is probably more important. The best way to buy gold ETF on any exchange is to buy using the SIP method. SIP stands for Systematic Investment Planning. A monthly or a weekly SIP ensures that you are buying at all prices. SIP is very effective when one wants to invest and remain invested for a time span of more than five years. In such a long time frame, when you invest on a monthly or a weekly basis, you have a good average rate.

A good investment is the one that is useful when you need it. Remember not to place all your eggs in one basket. A diversified portfolio is always better than putting all your savings in one instrument. For any further queries, please feel free to get in touch with our team.

Written By:Sumeet Jain,CMT
Sr. Analyst

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.