Gold is Old: Thirteen Reasons Not to Invest in Gold (Dhanteras Special)

 [A] Introduction: Dhanteras is an auspicious day to buy gold. Many people buy on this day. Gold, as we all know, is considered a safe heaven for the risk averse investors. Physical gold, in particular, is loved by the Bhartiyas in general. 

But, then, as an investor, one should never fall in love or hate any asset class, including gold. As many people rightly write about why one should invest in gold, I thought, let me try and educate my readers about why not to invest in gold! Every coin (including the gold coin) has two sides, you know!

[B] Reasons Not to Invest in Gold:

1. As one Economic Times article* notes, gold is a volatile asset class and only rewards the investors in long run only. For example, the returns of gold from 2013 are 7% only. It is only in long run that the gold becomes rewarding like 15-20 or even 25 years. It is only in very long term that gold gives a double digit return.

Compared to that, the equity provides far more better returns to someone, who is ready to remain invested for this long time period. 

Here is how the equity rewards much better to anyone, who chooses to invest in it, for a longer time period. 

2. Heavy taxation - how it eats into the real rate of return on gold

For example, coins and bars are considered as physical gold

Investing in gold through any wallet is called digital gold

Investing in gold through ETFs is called paper gold. Sovereign gold bonds also fall in this category only. 

Making charges on physical gold are 8.5% (Tanishq) but may range between 3% to 12%. Plus GST of 3% is to be paid on physical gold. Plus, in case you hold the PHYSICAL gold for more than 36 months, you have to pay 20.8% long term capital gain tax. If you sell it before this time period, you have to pay Short Term Capital Gain Tax at the rate, at which, you are paying your income tax. This clearly shows that holding the gold in physical form is very a very costly affair and can significantly drag down your real returns. But, still, holding some physical gold might be a good idea as it'd be the handiest liquid asset class in case of any kind of personal or national emergency.

Paper gold (except the sovereign gold bond) and digital gold are taxed at in case you hold the gold for more than 36 months, you have to pay 20.8% long term capital gain tax. If you sell it before this time period, you have to pay Short Term Capital Gain Tax at the rate, at which, you are paying your income tax

The only exception is here Sovereign Gold Bonds, which are very tax friendly:

- If held for eight years, they are totally tax free. They mature after a period of eight years.

- Plus, you get extra 2.5% interest on SGBs. This interest is taxable at the rate of your income tax, but subject to indexation benefits.

- If you sell it before one year, you pay Short Term Capital Gain Tax @ rate of your prevailing income tax slab.

- If you sell it after one year, you have to pay Long Term Capital Gain Tax (at 20% with indexation and 10% without indexation)

Please note that SGBs carry sovereign rating of Govt of India and are very safe. BUT THEY ARE NOT BACKED BY PHYSICAL GOLD like Gold ETFs. 

Compared to this, the equity is taxed at 10% in terms of Long Term Capital Gain Tax, and that also, if the long term capital gain tax crosses more than Rs. 0.1 million in one financial year. Yes, the Short Term Capital Gain Tax on Equity (Held for less than a year) is taxed at 15% fixed.

3. No Interest or Dividend Income: Gold's price keeps changing, based on demand and supply of the commodity. It does not earn any interest. Hence, it cannot provide any passive income and the only benefit you have is (by holding it) the appreciation - taxation.

4. Post Tax Returns Hardly Beat the Inflation: Though the gold may give double digit returns in long run, the heavy tax brings down the real rate of return and the final return is just about the same as the prevailing rate of inflation. Plus, physical gold may incur more taxation and storage cost too.

5. Purity of Gold is not always guaranteed and buying from a local vendor my lead to poor quality gold being bought.

6. No practical purpose: Warren Buffet never invests in gold as he thinks that it does not serve any practical purpose. It is against the core idea of value investing. He once stated about gold, "It doesn't do anything but sit there and look at you."

7. Bought for Emotional Reasons: When the gold is bought for emotional reasons, especially in poor families, believing it to be the real asset class. Overbuying any asset classes is not a good investing logic. But some media houses or AMCs or other bodies may push for its unnecessary shopping by the unsuspecting customers. I remember, during the 2020 crisis, when the gold was making new highs, some advertisements read the in BIG FONTS, "WILL THE GOLD TOUCH 1 LAKH?". If you buy gold believing such advertisements, you only have yourself to blame.

8. Wrong way of buying gold (Jewelry): Though the awareness is rising, many people still end up buying Jewelry, on the name of buying gold. The making charges can be as high as 35% in some cases and the gold, used in jewelry, would never be 100% pure, as pure gold cannot be molded to create shapes.

9. Connection with Re-Dollar Equation: The gold is imported. So, a weakening rupee will appreciate the gold price in India further and vice-versa. So, the gold price is also affected by a variable, that has nothing to do with gold.

10. Gold is considered to be providing the diversification to the portfolio, especially made of holding of equities. But one rule of diversification is unrelatedness. For example, performance of American and Indian share markets in very long run are not related much. In short run, they are, but not in longer runs. But the gold prices are inversely related with equity. It means that gold is not a true diversifier. It, at the most, provides some hedge.

11. Scarcity: As gold is scarce, its prices sometimes go up illogically as it is considered to be a precious metal. Mining gold is not easy either. 

12. Too Much Historical Importance: Gold has always been an asset class, that has been able to "store the value" of currency etc. In future, things like BitCoins may outperform gold replacing it as the hedger. So buying too much gold, based on its glorious past, might have its own risks.

13. Speculation in Gold: Many times, gold prices are based on pure speculation, giving a wrong picture to the investor. 

[C] Conclusion: Here, we have discussed thirteen potential reasons not to invest in gold. Like every asset class, gold has its own pros and cons. The article tries to make the reader aware about the cons of investing in gold.

[D] References:

*Gold investment: 5 right reasons to invest in gold - The Economic Times (indiatimes.com)