Things to know before Buying Gold.

Its somehow difficult to concede that investing in gold is not a wise financial decision. To include an asset in the financial planning basket of a household, the pertinent question to ask is: How would this asset be used? Investment in gold must pass that test.

As Investment:

In terms of buying gold as an investment, the scenario has undergone quite a change with the annual returns going down by more than half in the past 20 years. Over the last three years, gold has fetched a lower return of 4.68 per cent from 10.05 per cent earlier.

For Liquidity:

When there is adequate income, gold is bought; when there is a crunch, gold is pawned to raise money. The loan is repaid and the gold comes back home. Here, gold is a source of funding and a generator of liquidity. So one typically use gold to create a liquid asset that can be pressed into service. But, We have enough assets/ alternatives (with stable incomes) to take care of our liquidity requirements.

Untoward Incidents:

Consider an extreme situation of war, a riot, or a major disturbance that displaces the household. They have no choice but to leave and settle elsewhere in the world and begin all over again. What would they take along? Not their fixed deposit receipts or equity shares. But the gold, to be used anywhere in the world. It would be accepted unconditionally, helping them tide over the crisis. Thus, one should look at investment in gold as that portion which is for an extreme emergency.

Others:

All other purchases of gold, especially jewellery, should be seen as equivalent to other vanity indulgences such as clothes, bags and perfumes. 

What happens when we overdo the allocation to gold?

We collect assets that are seldom used. Gold is an unproductive asset. Unlike shares or bonds or deposits, it does not contribute to any kind of economic growth. A pile of gold will stay the same pile of gold no matter how much time passes. An equivalent amount of money deployed in a business or any other productive economic activity will generate actual wealth and will grow larger in a very fundamental way. Thus typically we hold a asset that generate no income. We invest in jewellery that comes with steep costs in the form of making charges and damages, and lose a portion of the value every time we transact. Thus, with the rising gold prices, the yellow metal is no longer considered a hedge against inflation. That is why we should not hold more than 5-10% of our wealth in gold. 

Source: TOI, ET