While gold is universally accepted as a hedge against inflation, physical gold in the form of jewelry still carries the risk of impurity and lower resale value.
Gold for most Indians is not just an investment instrument but more of an emotional investment. Higher liquidity and sentimental attachment towards the precious metal make it part of just about everyone’s portfolio.
Add to it the current uncertainties of the Covid pandemic and economic hardships; gold has witnessed more investment as an insurance against the uncertainty leading to soaring price points.
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But is gold better than bonds, which have similar risk-return characteristics? Let’s find out.
Long-term returns
There is no denying the fact that gold remains a fundamentally strong asset class. But it is not that it offers enormous returns in the long term. In fact, gold has historically offered a return of about 8.87% over the last 10 years.
Now this may well be below high-risky equity returns, the returns are still quite comparable to bonds which have offered an estimated 8.81% returns for the same period.
When markets are sluggish or uncertain, gold prices often rally strongly but the inverse means gold prices can also be flat for years. Government bonds, on the other hand, offer secured investment with benefits like cash flow, dividends, and interest income.
Safety and risk
Investment in physical gold was traditionally risky owing to storage concerns. Now, with Gold ETFs and Sovereign Gold Bonds (SGBs) available, safety and storage risks are almost at par with government bonds.
While gold is universally accepted as a hedge against inflation, physical gold in the form of jewelry still carries the risk of impurity and lower resale value. Government bonds, on the other hand, have no such limitations.
Minimum investment
The cost of minimum investment is higher in physical gold, Gold ETFs, and SGBs as compared to government bonds. This makes government bonds more suited for a large number of investors.
For example, to invest in gold ETF or SGB, one will be required to purchase minimum 1 gram of gold (approximately Rs 5,000). Comparatively, an investment in the newly introduced floating rate savings bonds can be made with as little as Rs 1,000.
Capital gains taxation (LTCG)
Long Term Capital Gains (LTCG) tax is applicable for gold investment, be it physical gold or Gold ETFs. LTCG tax is applicable after 3 years for both physical gold and Gold ETFs. In SGBs, the capital gains tax is not levied only if investment is kept till maturity date.
In case of bonds, LTCG tax can be exempted if investment is made in certain specified government bonds. For example, one can claim capital gains tax exemption under Section 54EC if investment is done in bonds of National Highways Authority of India or Rural Electrification Corporation Limited.
Depending on the investment made in the bond scheme, TDS is usually applicable on the Interest Income. However, eligible investors have the option to submit Form 15G/H, making it suitable for older investors. TDS, however, is not applicable on interest for investments made under SGBs.
Investment profile
An investment for the long term may require change of plans and option of premature withdrawal should be a consideration. With physical gold and Gold ETFs, there is no lock-in period for investment. SGBs, on the other hand, come with a minimum 5-year lock-in period.
Government bonds may or may not offer premature withdrawal option and sometimes reserve it only for senior citizens and not all investors. For example, RBI’s newly-launched floating rate savings bonds scheme offers no premature withdrawal for those below 60 years of age.
For the young, investment in physical gold or Gold ETFs may, therefore, be a more lucrative option compared to government bonds having limits on premature withdrawals.
Eventually, there is no one winner in the gold versus bonds face-off. Invest depending on your time horizon and financial needs, after factoring in the characteristics of both products.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
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