The yellow metal has given 28% returns in 2020 and promises security against inflation in the long run
What are the options that immediately strike your mind when you think of safe instruments in terms of savings and yielding better returns? Generally speaking, gold and real estate are the two most preferred options. Investment in property is proper goal-based investment and requires a lot of planning and research, but gold is something that every Indian wants to make a part of his or her investment portfolio. Especially for ladies, gold is always one of the top choices for investment.
It goes without saying that gold has a significant role in Indian celebrations, especially in marriages where it keeps a weightage of at least 20-40 per cent of the entire budget.
And, that's what makes India the second-largest consumer of gold across the globe. As far reaping profits are concerned, gold gave a return of almost 28 per cent in the year 2020 on a year-on-year basis, beating all odds of COVID-19 pandemic, whereas Sensex witnessed a growth of 16 per cent and Fixed Deposit (FD) returns stood at almost 6 per cent.
Due to COVID-19, most of the economies across the world were hit badly.
Further, the uncertainty on economic recovery drove investors to move towards safe havens of investments, which supported gold prices additionally. Moreover, the production cost of gold at the international level has witnessed a jump amid COVID-19 spread, which eventually gave a boost to gold prices.
Now, we are in 2021, and pretty well optimistic about gold because of multiple domestic and international reasons. If we pay attention to global economic scenarios, in its first press conference of 2021, the US Fed has predicted slower growth this year. Fed has kept its asset purchase budget intact at $120 billion per month. Fed chairman Jerome Powell agreed that the road to recovery will be much slower and longer than what was originally estimated by top economists. Powell made it clear that the Fed intends to maintain its current monetary policy of low-interest rates, a massive accumulation of treasuries and mortgage-backed securities.
Interestingly, the Fed has kept interest rates at near to 0 and has promised to keep it unchanged for at least 3 more years, which makes the opportunity cost of gold 0 for the US investors. US government has authorised a stimulus package of $900 billion, which is creating excess liquidity in the market and leading to higher inflation which will be supportive of gold prices.
Now, taking Indian scenarios into account is also important because India is the second-largest importer of gold. Last year, we witnessed a downfall in gold import because marriages and other celebratory functions were postponed due to government guidelines on lockdown in the view of COVID-19 pandemic.
Keeping the current situation in mind (when the vaccine has been given approval), functions that were postponed last year are most likely going to happen this year and this will create a huge demand for gold in India.
Secondly, COVID has given a boost to the usage of digital payment apps like Paytm, PhonePe, and others, which are offering a hassle-free mode of gold purchase and accumulation, which is now attracting many digital investors.
I think Sovereign Gold Bonds (SGB) offer the best investment tools. It gives you a fixed return of 2.5 per cent on a yearly basis, irrespective of gold's actual performance. The capital gains tax arising on the redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.
Now, if we compare gold with FD, the risk-taking appetite of investors should always be considered and taken into account. Gold has given almost 100 per cent absolute returns in the last 10 years, 15 per cent in the last 5 years, 20 per cent in the past 3 years and 28 per cent in the year 2020 despite the pandemic.
FD interest rate is almost 5-6 per cent in almost all the leading banks in India, and 7 per cent in some of the comparatively smaller banks, which is just above the inflation rate, which was 4.95 per cent in 2020, and 3.75 per cent currently in 2021, and much lower than gold returns of the past 10 years. Also, as the government is enhancing liquidity through stimulus packages, and we expect a higher inflation rate in 2021. So, for long-term investment, one should go for gold investment which always gives security against inflation in the long term. The performance of gold has been very good compared to FD. We expect the same in the future as well.