Gold is widely recognized as a safe-haven investment, valued for its ability to provide stability and security in times of economic uncertainty. Its long-standing reputation as a reliable store of wealth makes it highly sought-after during periods of heightened volatility and geopolitical tensions.
Amidst increasing interest rates and a dwindling U.S. banking sector, gold offers protection against macro volatility. The recent 500 basis point increase in the policy rate by the Federal Reserve, the fastest rate of hikes since 1980, along with the failures of SVB and concerns surrounding the demise of First Republic Bank, has prompted a flight towards safe-haven assets.
As a result, the price of gold reached its highest level since August 2020, soaring to $2,055.70. U.S. gold futures have also experienced significant gains of 12.98% over the past 6 months. In a span of 5 years, gold has outperformed traditional safe-haven assets (the Japanese Yen and U.S. Treasuries) and even major equity indices, with spot futures prices increasing by 41.36%.
Gold has proven to be a reliable choice for investors seeking stability and security during uncertain times.
Investing in gold requires an understanding of the differences between physical gold and gold exchange-traded funds (ETFs) or mutual funds. It is important to evaluate the downsides and benefits of the two investment methodologies.
In this blog, we will analyze gold returns adjusting for associated costs, and highlight why gold funds are a compelling investment choice. We will discuss how Non-Resident Indians (NRIs) can conveniently invest in gold funds to capitalize on the advantages they provide.
Physical gold involves purchasing coins, bars, or jewelry made of precious metals. Gold offers tangible ownership, along with associated costs such as storage, insurance, and higher initial expenses.
In comparison, gold ETFs are a convenient and cost-effective method to invest in gold. These funds trade on stock exchanges and invest in gold-related assets: futures and options contracts, mining stocks, and sovereign gold bonds (SGBs).
When distinguishing between physical gold and gold funds, below are the fundamental points to evaluate:
We can compare the historical returns of gold ETFs to the prices of physical gold. We will use the SPDR Gold Shares, the largest gold ETF, to represent gold funds and gold spot prices to estimate the prices of physical gold.
Below are the top 5 Gold ETFs ranked by 5-year returns for a lump-sum investment:
Other honorary mentions are ICICI Prudential Regular Gold Savings Funds (FOF) and Aditya Birla Sun Life Gold Fund. Note that the availability of different gold funds may vary based on geographical location. Check with your investment platforms to determine the specific gold funds accessible in your area.
For Non-Resident Indians (NRIs), gold mutual funds eliminate the need to open a demat or trading account. Investing in gold funds for NRIs is convenient due to the following factors:
These funds eliminate the purity issues, making charges, and storage hassles that often come with physical gold investments. NRIs can invest in gold ETFs, a straightforward, low-cost, and accessible investment option.
Physical gold is more tax efficient than gold funds, especially for those in the higher income tax brackets.
A few points to note:
With the U.S. experiencing high inflation rates, it is helpful to analyze the performance of gold from 1973 to 1979, when the U.S. experienced significant inflation with an average annual rate of around 8.8%. During this time, gold saw a remarkable annual return of 35%. This connection is logical as inflation often devalues the dollar, leading investors to seek commodities for protecting their purchasing power. Gold outperformed stocks, bonds, real estate, and other traditional investments in the 1970s, soaring by an astonishing 2,300%.
Even during the Great Financial Crisis (GFC), gold became a robust long-term equity hedge. Prices increased by 50.6% post-GFC and outperformed the S&P 500 by 37%.
Finally, gold funds provide valuable diversification benefits to investment portfolios. Compared to other commodities, real estate, and private equity since 2009, gold demonstrates a lower correlation with the equity-based MSCI World Index. With a historically low correlation to equities and bonds, gold serves as an efficient diversification tool.
Gold remains a sought-after safe-haven asset during inflation, economic turmoil, and geopolitical concerns. Its resilience in market crises makes it advantageous for modern portfolios, assisting in risk management. While physical gold involves additional expenses, NRIs can invest in gold funds without a Demat account. ETFs and mutual funds are cost-effective and convenient options for long-term investors.
Inri, backed by Y Combinator, is an investment platform dedicated to NRIs & OCIs to invest in Indian markets. Inri is like Wealthfront for India, making investing in India fast and hassle-free.
This article does not provide any investment advice. Please consult your financial advisor before investing.