Why you should not buy gold for speculation

Gold prices are inching back to record highs. It is again that time of the year in India when people flock to jewellers to buy the yellow metal and the right time to ponder over your strategy for the much-coveted yellow metal as an investment avenue.

For the jewellers, this might not be a windfall year as a deficient monsoon is seen adversely impacting the rural income, in turn restricting demand.A Reuters report has projected a huge 40 percent fall in gold imports during the peak demand season of September-December.

This despite the World Gold Council predicting a considerable latent demand in July-December."...Despite the uncertainty, it is important to remember that there is still a lot of latent demand for gold and with the upcoming festival and marriage season falling in the last two quarters, we should see an upsurge in demand. Gold's strong performance track record and proven role as a preserver of wealth should continue to support demand," a WGC report published last week said.

India witnessed a 20 percent year-on-year fall in gold imports in absolute terms during April-June. Reuters

India witnessed a 20 percent year-on-year fall in gold imports in absolute terms during April-June. Demand for jewellery fell 10 percent, the report said.

However, gold will remain on top of investors' mind as they scramble for a hedge against the spiralling inflation. That is precisely why analysts saythere is more upward action left in gold.

"Looking at the current scenario, of Euro crisis, US not doing too well, crude oil prices expected to rise, also rumours of quantitative easing (QE3) in the US, we expect to see a very good rally in gold in the near future," saidNitin Nachnani, Research Analyst at Geojit Comtrade.

An increase in crude oil prices will definitely push up prices across-the-board. The possibility of a QE3, which will release more cheap funds across the globe, has become clear and present with the US Fed's minutes indicating a step to this effect in the near future.

The following is an attempt toresolve a hold/buy/sell confusionthat play on a lay investors' mind.

Should you hold or sell?

So if you bought gold sometime back and are now wondering whether to realise the profit at least on a part of your gold holdings, the answer really would depend on why you bought it in the first place. "If you've bought for long term, hold it. If you've bought it with the objective of selling to book a profit, there is no harm in selling. If you bought gold four years back, you can easily book a profit now," says Pankaj Mathpal, a Mumbai-based certified financial planner. He, however, recommendsspreading out the sales, beginning now.

But if you've bought only a year back? Selling now does not make sense. "If you bought gold one year back, and sell now, the returns will be nearly flattish. We are recommending our clients to hold,"says, Suresh Sadagopan, another CFP based in Mumbai.

But not all agree. "Now is not the time to sell, holding is a better option," arguesNachnani, who thinks gold witness a further uptrend.

"Holding on to gold is a safe bet. In the last five years, gold has rallied from around Rs8000, to current Rs30,000 plus, that is around 400% returns,"Nachnani says.

Another way to decide on how much to hold and how much to sell is to look at your asset allocation and rebalancing your portfolio. If your portfolio is skewed towards gold, it is better to sell and maintain gold's share at 5 to 10 percent. Ideally, gold should form 5-10 percent of your portfolio.

Should you buy?

Let's get this straight; we recommend that a lay investor should not buy gold for speculative purposes, because only professionals, who track markets on day-to-day basis, will know how to make the most of such trades.

So what one could do is be clear on the purpose of the buying. "For most lay investors buying gold is more about sentiments than calculations. If you need to buy gold for a daughters' marriage or other occasion, you have no options but to buy," Mathpal says.

If you plan to buy gold for personal consumption, it's a call you need to take. If you are planning to buy gold from an investment point of view, a long-term staggered approach will work.

Says, Ranjit Dani, a certified financial planner based in Nagpur, "It is not advisable to buy gold for speculative purpose. However, for investments, one should go for a long-term staggered and disciplined approach. This could be in the form of a systemic investment plan (SIP) through gold ETFs."

Do, ensure that even as you walk the steady path of SIP, you don't go overboard and maintain gold only as 5-10% of your overall portfolio.

Options of buying gold:

Gold ornaments: When you choose the traditional choice of buying gold jewellery, look for purity (18-22K). Keep in mind, that if you are buying from a local jeweller, you will have to take his word on purity. And also pay the making charges. That's not an issue with branded jewellers, but that could be more expensive.

Coins and bars: Banks allow you to buy coins and bars of different denominations. These coins and bars of 24K gold come with a hallmark certificate. Some banks also offer discount when you buy gold online, for instance ICICI Bank Ltd. There are no separate making charges for coins and bars with banks. For jewellery and coins and bars, you would need a bank locker for safe storage, where you would need to make a fixed deposit as well as pay locker charges.

Gold exchange-traded funds (ETFs): One of the best ways to buy gold. You don't need to break your head over purity since it is not physical gold. Here the gold is in an electronic demat form. One unit of gold ETF is typically equivalent to 1 gm of gold. Here you will have to bear the charges of opening a demat account as well as the brokerage as well as pay a fund management fee of 1%.

E-gold: This you can buy from authorised participants of National Spot Exchange Ltd (NSEL), a spot market. However, you will need a trading account with an authorised broker to buy e-gold. You can convert E-gold to paper gold as well as physical gold with a small fee.

Now that you have some clarity on; to buy, hold, or sell gold and various forms of gold you could buy, take the call and make the most of the yellow metal.

Published Date: Aug 24, 2012 08:50 am | Updated Date: Dec 20, 2014 07:28 pm

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