The European debt crisis has increased the buzz surrounding gold, but do you know the disadvantages of investing in gold? While gold prices do have the potential to increase as discussed in our previous blogs, you should be aware of the additional costs and risks involved when investing in gold.

If there is something positive about it that makes people want to purchase gold in droves, then there are going to be some negatives that make you think twice, too.

These things are real concerns, though most people agree that the advantages outweigh the negatives and they purchase gold anyway. These disadvantages are listed below.

1. High making charges : You have to pay very high making charges, especially if you go for exotic designs. The making charges vary according to design, but on an average, it will be around Rs 200 per gram. Considering the prevailing price of 22 carat gold that is used in jewellery, this works out to be a 10% mark-up. Note that investors will never be able to recover these costs if they decide to sell the jewellery.

2. Impurity : The purity of gold is another problem that one encounters in case of jewellery. Most of the time, it may not be of the level that is being claimed. Though this problem has receded due to the widespread use of ‘hallmarking’, it has not been resolved completely. Since the hallmarking services test only a fraction of the gold jewellery submitted for testing, there are concerns with the hallmarked jewellery as well.

3. Less resale value : Most jewellers are ready to exchange the gold sold by them at market rate and very few are willing to pay in cash. Most of them deduct 5-10% of the value if you want hard cash. The deduction is higher if you try to sell gold that has been bought from some other jeweller. This is because he will question the gold’s purity, claiming it to be supect, and pay you less.

4. No regular income : Gold investment does not provide any current income like dividend or rental as in Stocks or real estate where investors can reap the rewards of their investment without having to sell their asset.

5. Problems in Physical storage : Lack of investment in gold is the factor of storage / treatment / handling. Storing Gold in large quantities relatively risky and expensive. However, there are possibilities for gold investment in a form of a certificate or an account in which the owner does not held the physical gold but later can represent it. Although there are well established forms of gold investment today, some may still wonder whether such form of gold investment will be still equally reliable in case of a system breakdown. Also, if storage is not good, though wrapped in protective cover, allowing the oxidation and discoloration.

6. No Financing or Leverage: When you invest in gold, you will need to have all of the cash on hand to make a purchase. You cannot use leverage, or any type of financing, for this type of investment or purchase. This can severely limit the amount of people that can get involved in the market.

7. No Tax Advantage: Investing in gold is not going to provide you with any type of tax advantage in contrast to other tax saving instruments available in market.

8. Subject to Confiscation: One of the biggest risks of investing in gold is that it is subject to confiscation. The government could come in and confiscate all of the gold in a warehouse if they deem it necessary. In that case, there is nothing that you can do about it and you will lose your investment.

9. Actual returns are less than nominal returns: If gold does go up in value, the gain is nominal rather than an actual increase in buying power. This is because when gold appreciates it typically coincides with devaluation for paper money. Moreover, those gold profits are taxable.

10. Partially Liquid : An unfortunate social aspect in most families in India related to liquidity is that gold has sentiments attached and is the last item to leave in case of financial difficulties. This negates the entire purpose of gold as an liquid asset.

11. Massive growth potential is limited right now : Gold has seen a near meteoric rise in value over the past few decades, but it was in a bear market from past 20 years after a rise in 1980’s as indicated in below chart. Talking about historical returns, gold has given 20-24% returns in past 5 years but has given only 7-8% returns in past 30 years. It shows that gold has been able to beat inflation which is as equivalent to investing in fixed deposit rather than providing huge returns. …

So it fares poorly in terms of real inflation adjusted returns in comparison to shares or real estate. The problem for gold in growth terms is that the market itself is highly evaluated. After a great run in past 5 years, Everyone knows the value of investing in gold and that takes away a lot of the opportunity. In other markets, there are opportunities and sectors where people still have not discovered the potential that exists. Keep reading our further newsletters for more interesting information.

The Purpose of writing this blog is to know what are different aspects which sometimes make gold our ENEMY… ,enjoy reading &  wait for our next series of MARG Jugaad: Ideas to make your life simpler & wealthier…..….

Price is what you pay, Value is what you get…