How To Take Advantage Of Higher Gold Prices?

If you want to take advantage of an increase in gold prices, do so through paper gold products rather than physical gold.

Gold may face similar dynamics in 2022 to those of last year, as competing forces support and curtail its performance. Near term, the gold price will likely react to real rates in response to the speed at which global central banks tighten monetary policy and their effectiveness in controlling inflation. This is how the World Gold Council (WGC) forecasts gold price trends in 2022. It even says that while rate hikes (as are expected to take place in the US and perhaps in India) can create headwinds for gold, history shows their effect (on gold) may be limited. Moreover, at the same time, elevated inflation and market pullbacks will likely sustain demand for gold as a hedge. Plus, jewellery and central bank gold demand may provide additional longer-term support, WCG argues.

If you as an investor concur with this forecast and want to invest in gold to take advantage of any upswing in 2022, then the way to do that is to invest in paper or digital gold, rather than physical gold, which is the traditional way in India to buy gold.

“Indian gold jewellery demand almost doubled y-o-y in 2021, surging past the pre-pandemic levels to reach a six-year high of 611 tonnes. Record quarterly demand of 265 tonnes in Q4 set the seal on this remarkable annual performance,” a recent WGC report states. The total gold imported in India in 2021 was 924.6 tonnes compared to 349.5 tonnes in 2020, an increase of 165 per cent. 

Investing In Paper Gold

If you want to take advantage of gold’s price increase, you can invest in digital or paper gold through instruments such as sovereign gold bonds (SGBs) that provide interest over and above the gold price. 

Paper gold gives you the chance to benefit from the price increase without the worries of storage, impurities, theft, etc. With 'paper' gold, the risks and expense of storing are dismissed as the investor can 'store' the investments in a demat form. 

Given the difficulties associated with physical gold as an investment, an investor may be better off looking at other options such as paper gold.

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bond is issued by the Reserve Bank of India (RBI) on behalf of the government. According to the RBI, the issue price for the SGB Scheme 2021-22 has been set at Rs 4,791 per gram. For online investors, the Gold Bond is cheaper at Rs 4,741 per gram. 

One of the main advantages of SGBs is that they are available in denominations of one gram of gold (and its multiples). As an individual investor, you can buy a minimum of one gram and a maximum of 4 kg.

The bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. You can subscribe to SGBs during primary issuance. Bond tenure is 8 years but can be liquidated sooner. 

Apart from SGBs, investors can also consider gold exchange-traded funds (ETFs), which are passive instruments based on gold prices that invest in gold bullion. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of high purity (99.5 per cent). 

According to financial advisors, gold can form about 5-10 per cent of your overall investment portfolio.

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