Is it worth taking up a loan to buy gold?
Numerous articles and blogs have been written over the Internet advocating using loans to buy gold. Such contents were most probably written before 2012. Back then, buying gold and holding it for six months would be a profitable strategy. The prediction made back then indicated there was a high chance of gold price appreciation in four or five years. Hence, the loan can be settled in full just by selling a portion of gold savings, making the remaining gold bars to be earned for free.
I mean - who does not like that?
Therefore, the strategy proposed might sound helpful. The gold chart showed that the gold price did not decline for 12 months, giving approximately 15 - 20% return per annum. Excitingly, there was a time when gold was yielding 30% per annum return and became the talk of the town.
When assuming 20% per annum return, acquiring gold through personal loans makes logical sense. However, when the gold prices began to drop in 2013, this method may not be ideal considering how volatile the gold price can be. Making personal loans for the sole purpose of buying gold might seem a risky endeavour.
The use of existing cash savings is a better approach
In my opinion, using our existing savings is the better option without taking up any loans. As described in previous chapters, gold is another form of savings with middle to long-term time frame. Instead of keeping too much cash in the bank, we can consider channelling it in the form of gold. This form is more protected in terms of value.
Taking up a loan for investment purposes makes more sense for real estate. The reason is that the effective rate for housing loans is much lower than that of personal loans. In addition, banks would be more interested in funding a significant amount for real estate/property as they are more comfortable. Banks typically do not grant loans for gold purchases, just so you know.
Therefore, using our existing cash savings would make more sense to start gold savings. However, allow me to share two scenarios in which taking a personal loan might make sense:
Scenario 1 - To force yourself to save
This is one way to force ourselves to save through force. This is based on the concept of how disciplined we are in paying our bills monthly. We are very good at paying bills but not so good when saving money. This way, we pay off the loan every month while the capital is eventually used to purchase gold.
The thing to note is that the loan capital is utilised exclusively for gold purchases and not other items. This plan may not be for you if the money is utilised for other items.
Scenario 2 - To generate income as a gold agent
Some people like to talk about gold and share the importance of gold. While doing so, we promote the importance of gold and create awareness regarding this topic (though not being paid for doing so). However, when people are coming forward to start gold savings, they are stuck because they cannot facilitate accordingly. Only agents can facilitate buying gold for newcomers and unlock the incentive features.
Typically, we need to make a big purchase to qualify as an agent. Once we are qualified as agents, we will get incentives for every transaction.
Bonus tips
For those who wish to make a personal loan to become an active gold agent, then it is agreeable under this arrangement. The essential criteria to note is to learn from a trusted and successful agent. Even if income generation does not happen expectedly, the purchased gold can be sold off, and the money is not a loss per se.
In summary, there is no clear-cut answer to this question as it fundamentally depends on our situation. My personal preference is to purchase gold using our savings.
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Your buddy on gold investing,
Naresh G