Gold and Gold ETFs

Gold v/s gold ETFs

I like ETFs. However, Gold ETFs - especially for long term are an exception to this rule. The reason is simple - Gold ETFs are too costly. The typical fund management fees is 1%. As compared to this, when you buy gold, typically in the form of coins and sell them back, the total transaction cost is 10% (Yes it is that high). So if you plan to hold gold for more than 10 years, it is better to buy coins.

When should one use gold ETFs?

Gold ETFs can still be used to invest in gold systematically - start and ETF with 1 or 2 grams of gold per month and every couple of years or so, purchase coins or jewellery and sell the ETF - on the same day. This way, when you are buying gold, you do not need to worry about the price.

Why should one invest in gold?

But why exactly do you need gold? Gold is the investment of last resort - when something totally unexpected happens and you lose everything else, physical gold is likely to still have value. A major market meltdown, a war or hyperinflation are likely scenarios. A portfolio that has 5% in gold is hardly hedged against such events (such events are likely unhedgable) but with that gold, you can begin a new life. Incidentally, another reason for preferring physical gold is that a large number of such meltdowns would mean that the ETF would become worthless.

How much to invest in gold?

Typically, 5% is a good amount to invest in gold and gold jewellery. Generally this amount is easily taken care of by the jewellery component. For people who have their other financial goals on track I would suggest keeping 10% of their total savings in gold.

Conclusion

So this is another area where I differ from traditional finance advise - rather than Gold ETFs, I would suggest you to keep physical gold in a place that is secure but reachable in case of emergency.