Buy gold only for consumption this Akshaya Tritiya

With Akshaya Tritiya on May 7, many of us would be looking to buy a gold coin or piece of jewellery to mark the auspicious occasion. But how does gold fare as an asset class? Should you buy it for earning returns? Or should you buy it only for consumption? Is it still relevant as a hedge against inflation?

Need for buying gold

Any financial portfolio should have various asset classes based on the investor's risk profile, ability to take intermittent volatility and financial goals. So, an aggressive investor or someone whose goals are some time away should have a higher proportion of equities, while a conservative investor or someone who is approaching his/her goals should have a higher share of fixed income investments. But gold as an asset class has not beaten inflation over a three to five year period and hence, investors can look at other options.

"Over three years return from gold was 3% compounded annual growth rate (CAGR), while over five years it was hardly close to 1% on an annualised basis. So as an investment class gold has hardly been a good investment option to hold for a long time. It does not seem to have beaten even inflation in this case,'' says Ankur Maheshwari, CEO Equirus Wealth Management.

Agreeing with this view, Amit Jain, co-founder Ashika Wealth Advisors, points out that over the last 45 years price of domestic gold has appreciated only because of depreciation in rupee, and not because of an inherent rise in the value of gold.

"As an investment class we don't advise investing in gold for aggressive investors, but conservative investors can hold up to 5% because of their belief of investing in safe instruments,'' he says. He advises arbitrage or liquid funds as better options to beat inflation.

Maheshwari adds that unlike equities where companies' earnings determine share prices or fixed income where the quality of the paper determines the yield, in the case of gold there is no clearly identifiable parameter where it is possible to get an idea of gold in three years. Hence, it is difficult to predict returns from gold as an investment. "Demand for gold will be based on specific consumption, such as a marriage in the family in the next few years for which investors may want to accumulate,'' he says.

However, according to Naveen Mathur, director - commodities and currencies, Anand Rathi Shares & Stock Brokers, from a long-term perspective, gold is an asset class which investors must include for the simple reason of diversification of the portfolio.

"If you are looking to invest in gold only for making handsome returns, then I would not to be too aggressive on it. But it will help in diversifying one's asset class and minimise the risk of losses from other asset classes like equity,'' he says.

Should you buy this year?

Akshaya Tritiya continues to remain an auspicious day for buying gold, and in the last 10 years gold has given a return of 8% on an average, points out Navneet Damani, vice-president, commodities research, Motilal Oswal Financial Services.

"We believe that despite a few lacklustre years one could make good returns as on a macro level major economies could witness some slowdown thereby attracting buying in the precious metal. One can start investing at current levels and look to average on the downside till Rs 30,600 level is held on,'' he says.

Gold as a hedge against inflation

Large economies across the world have had decades of a low inflationary trend, despite this gold has found ample takers as far as investments go, says Pritam Kumar Patnaik, head commodities, Reliance Commodities.

"Additionally, there exists a concept of "real inflation", which is generally much higher than the government published inflation numbers. While in the short run inflation trend could oscillate between high and low, one must appreciate the fact that gold has been able to maintain its purchasing parity despite this. Ideally gold should constitute 10% to 15% of one's portfolio, as a hedge against inflation,'' he says.

Reasons affecting the gold price

In the international market, investment and physical demand from key consumers, global geopolitical conditions, economic situations and performance of equity markets, movements of US dollar and purchases of various central banks, largely direct gold prices. In the domestic market, coupled with the overseas factors, rupee fluctuations and seasonality have an impact on prices, says Hareesh V, head commodity research, Geojit Financial Services.

"Purchasing gold on a periodic basis would be the ideal strategy as the yellow metal largely exposed to various micro and macro-economic factors,'' he says.

According to Damani, this year gold is likely to trade with a positive bias. Immediate resistance is close to Rs 32,500 and a break above this level could take it higher towards Rs 35,000 level and eventually in the next couple of years it could head towards Rs 40,000, he says.

Buying gold in digital format

It is a better option to buy gold in digital format than physical gold as it ensures transparency and addresses issues of theft and storage, experts say. Nowadays, digital platforms have earned a lot of traction and this platform as such is attracting a lot of new young buyers.

"E-gold takes care of purity, allows holding in the digital locker for free, 24X7 buying selling, buying through mobile app or desktop, converting to physical delivery or selling it back for cash, buying as low as Rs 500,'' says Damani.

Purchasing of physical gold is ideally safe as it does not faces any counterparty risk. Liquidating of physical gold is also considered easier. However, it carries higher transaction cost like making charges, freight, insurance, etc. Keeping physical gold in safe custody may also bring additional expenses, points out Hareesh.

Mobile wallet PhonePe is one of the players that allows purchase of gold through the app. Last year the platform saw a three times growth in gold sales during Akshaya Tritiya, says Priya Narasimhan, director and head- bill pay, recharge, gold and revenue categories

Customers can log on to the app and select the 'Gold' option in the 'My Money' section. They will then get the option to choose between two providers - SafeGold (99.5% purity) and MMTC-PAMP (99.9% purity). Once the customer decides the provider, they are presented with the price per gram. Customers can buy gold both as per the grams of gold they require or as per the money they have at their disposal. After they have finalised the gold they want to buy, they can complete the payment on the PhonePe app using their preferred mode of payment - UPI, debit or credit card. Once the payment is completed, the gold purchased starts reflecting in the customer's digital locker and the physical gold is stored in a bank-grade insured locker facility run by their chosen provider SafeGold or MMTC PAMP.

SHOULD YOU BUY OR NOT?

• Buy gold only if you need it for consumption or if there is a specific need like a marriage in the family in a few years from now 
   
• As an investment, gold is unlikely to  offer as high returns as equities or fixed income over a 10-year period, even if prices may see a spike in the interim