Best Gold Investment Options For Inflation

Gold holds deep emotional bond with India’s culture, and has been a financial support for investors through the years. Investors consider the yellow precious metal as a useful hedge against inflation as owners can anytime turn to gold to preserve their purchasing power against rise in prices across the economy.

In the second half of 2023, for instance, the demand for gold increased 4% year over year. Retail prices measured by consumer price index (CPI) rose 4.81% in the second quarter ending in June 2023. Investors warn that further price hike may, however, dampen India’s gold demand in 2023 by 10% from a year ago. The price of 24-carat gold as on Sep. 13 was INR 5,132 per gram, up by 0.86% as compared to its price a month ago.

Gold has also provided positive returns during falling equity markets, depreciating currency, geopolitical uncertainties, to name a few. Here’s a detailed guide on how you can determine the best gold investment options against inflation.

Why Gold is a Good Hedge Against Inflation

Inflation reduces individuals’ purchasing power and impacts investor’s investments as prices rise across commodities while income remains the same. Although gold may not match the pace at which the rate of inflation is moving, it’s a useful hedge against financial risk. 

Here are some popular benefits of investing in gold to protect against inflation, as follows:

• Gold’s value typically increases with time. For instance, in 2017, the value of 10 grams of gold was INR 29,667.50, and now it has risen almost 40% to INR 50,911 as on Sep. 14, 2023.

• Gold has a good historical track record. Gold has historically preserved its value for a longer period of time as compared to other assets.
  
• Gold outperforms at times of rupee depreciation. When the prices of commodities soar, inflation often tends to devalue a country’s currency. However, gold’s value tends to rise when the value of the rupee declines due to inflation.
  
• Gold’s demand increases when inflation rises. There’s also a psychological factor when investors associate gold as a useful hedge against inflation. Generally, most people tend to lose confidence in the value of their country’s currency due to depreciation, and turn toward investing in tangible assets like gold.

What to Consider When Investing in Gold Amid Inflation Fears

The price of gold goes up when its demand rises, typically pushed by household and industrial demand, and investment demand. 

Here are the major ways of investing in gold, as follows:

Consider Investing in Physical Gold

Jewelers are the first point-of-contact to buy and sell gold jewelry. Whereas, gold coins and bars can also also be purchased via bullion traders or government-backed institutions such as the MMTC. Investors need to make sure to check hallmarking, which guarantees the purity and fineness of gold as certified by the Bureau of Indian Standards (BIS). 

In case of gold jewelry, there is a making charge of up to 20%, and GST of 3% levied on the purchase of gold jewelry. Capital gains tax is charged when selling the yellow metal.

Disadvantages of investing in physical gold include: 

• Prices fluctuate almost on a daily basis, and are different among cities in India
• Requires safe storage from theft, and there is always a fear of losing the precious metal
• Costs extra for purchasing a locker at home or in a bank
• Doesn’t provide return or interest unlike digital form of investment in gold

Consider Investing in Digital Gold

Buying digital gold involves investing in exchange traded funds (ETFs), gold mutual funds, and gold futures. Here’s a brief discussion on these investment options, as follows:

Gold Exchange Traded Funds (ETFs)

Gold ETFs are units of gold traded on stock market exchanges. ETF units can be purchased like the way mutual fund units are available for trading on stock exchanges. You can start investing in gold ETF by choosing a preferred brokerage firm, and start trading with your demat account. 

Based on the investment firm, the ETF tracks the price of a physical bullion, or the underlying basket of stocks of gold mining and refining companies. It doesn’t involve a lock-in period, which means that you can enter and exit as per your convenience. However, there are brokerage charge, processing fees applicable. 

Advantages of investing in gold ETFs include: 

• Investors can buy stocks of gold companies in the stock market
• No lock-in period, and offers more liquidity
• No making charge, or GST levied unlike purchasing a physical gold, or jewelry
• Investors convert the ETF into a physical gold when the units match the metal’s market value

Read more: How Do ETFs Work?

Invest in Gold Mutual Funds

Investing in gold mutual funds involves buying stocks of gold companies, which are bought and sold at market prices. Some of the popular gold mutual fund companies include Invesco India Gold Fund, SBI Gold, Nippon India Gold Savings Fund, DSP World Gold Fund Quantum Gold Savings, IDBI Gold Fund, Kotak Gold, among others. Investors need to note that there are charges to manage funds, expense ratio free, as well as charges of buying the underlying assets.

Advantages of investing in gold mutual funds include: 

• Investment can be made for long-term gains
• Safer investment option that storing a solid gold
• More options for diversification, management, and liquidity of funds 

Read more: ETF Vs. Mutual Fund: What’s The Difference?

Invest in Gold Futures

Gold futures contracts are useful hedging instruments against inflation that allow investors to buy and sell gold in a minimum of 100-gram denominations at stock exchanges including National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Multi Commodity Exchange (MCX). It allows investors to settle the maturity date of the contract and the value is decided at the time of transaction. Remember, investors need to consult an advisor or broker before transacting in gold futures as dealing in such investment requires skills.

Pros and cons of investing in gold futures include: 

• Best for short-selling investment 
• Investor don’t need to worry about storage or security risks such as loss or theft
• Investors should remember that there is a risk of total loss on trade
• Gold futures cannot be converted to solid gold

Consider Investing in Sovereign Gold Bonds (SGBs)

The Reserve Bank of India (RBI) issues SGBs on behalf of the Government of India in different tranches during the financial year. The value of one unit of gold is based on the value of one gram of gold with 999 purity. The central bank issues SGBs and are made available via banks, post offices, brokers, as well as online platforms. SGBs are popular among investors as it guarantees a 2.50% interest rate per annum on the premium price. SGBs have a tenure of eight years, but can be redeemed after five years.

Advantages of investing in SGBs include: 

• SGBs have sovereign guarantee 
• One unit of SGB is linked to the gold price of 999 purity
• Investors earn assured 2.50% interest rate upon premium amount
• SGBs can be used as secured loans to apply for a loan

Read more: How To Buy Sovereign Gold Bonds

Bottom Line

Although gold can serve as a useful hedge against inflation, its price can fluctuate due to various reasons. Also, the rising prices of commodities isn’t the only factor that influences the gold price—supply and demand, investor sentiment, and other commodity market dynamics are also factored in. 

Alternatively, gold’s value tends to decline when the investors turn to stocks, bonds, and mutual funds, and other traditional investment options. That said, experts suggest that the best way to protect your investment against financial risk at times such as inflation is to diversify your investment portfolio and invest in assets that maintain its value over time.