Is this a good time to invest in gold? And if it is, should you buy physical gold or invest in gold Exchange Traded Funds (ETFs)? In this article, we discuss whether market timing is important for investing in gold.
Your decision on when to invest in gold (market timing) should be determined by your objectives. Are you planning to invest in gold for consumption purpose? If so, market timing is not important. Why?
Suppose your objective is to buy gold for your daughter’s marriage 10 years hence. You can set up a systematic investment plan for 120 months to achieve this objective. This way, you will be setting aside money from your monthly income and also spreading your investments through the ups and downs in gold prices. Your objective is to buy jewellery for your daughter’s wedding, not to profit from fluctuations in gold prices.
Investment asset
What if you are considering gold as an investment asset? Your objective then is to buy and sell gold to capture short-term movements in gold prices. Market timing is, therefore, important. You can apply technical analysis to time your investments. Investors also buy gold during market crises that occur because of a natural disaster or pandemics such as COVID-19 or events such as the 2008 sub-prime crisis. During such times, gold prices rise because of ‘flight to quality’ — investors consider gold to be the safest asset during a crisis. It is preferable not to have more than 15% of your total portfolio in gold.
Financial versus physical
You should consider investing in gold ETFs and not physical gold for two reasons. One, you can easily liquidate your investments at the spot price of gold. Selling physical gold is not easy. Also, the merchant who buys your gold will charge a commission (charge) on the spot price.
Note that your objective of buying gold was to sell the investments close to the wedding date and use the sale proceeds to buy jewellery. So, using gold as collateral to raise money cannot be argued as a reason for buying physical gold.
Importantly, investing in gold ETFs allows you to buy trendy jewellery closer to the wedding without worrying about the increase in gold prices. Why? If gold prices move up, so will your investments in the gold ETF, as the ETF tracks the spot price of gold.
If you are investing in gold to capture short-term gains, market timing is easy with ETFs. Not only can you buy and sell ETFs intraday, you can also convert your investments into cash in quick time.
Two, storing your financial gold is easy; you need a demat account to keep your gold ETFs. In contrast, you need a bank locker to store your physical gold. Now, getting a bank locker is difficult. Also, lockers have become expensive in recent times.
Before you buy a gold ETF, check the proportion of physical gold that the ETF holds in its portfolio; higher the proportion of physical gold, closer the ETF will trade to the spot price of gold. And, that means your objectives will be well served.
You can find an ETF’s portfolio composition from the fact sheet available on the investment firm’s website. Also, ensure that the gold ETF you intend to buy is actively traded in the market; active trading will help keep the ETF’s price closer to its net asset value.
Note that asset management firms also offer gold fund-of- funds, an open-ended fund that invests in a gold ETF managed by the same firm. You should buy gold ETFs, not the fund of funds; for the latter will charge you a fee in addition to the fee for investing in the gold ETF.
(The author offers training programmes for individuals to manage their personal investments)
