Investing in Gold and Gold ETFs

Investing in Gold provides a sense of security as it is tangible unlike many other financial products which are intangible. Gold prices are purely determined by supply and demand and less likely to fluctuate wildly. There are many time tested advantages of having gold as an investment:

  • Safety: In volatile and uncertain times (as seen recently due to recession) Gold provides safe haven as there is no default risk. Gold has its own intrinsic value.
  • Brings diversification and stability to a portfolio: the forces acting on gold are different from those acting on other financial assets. Most of the time it is negatively correlated to stocks and bonds.
  • Highly liquid and portable: Gold can easily be converted to cash and vice versa, prices are internationally determined.
  • Tool against inflation: Irrespective of market cycles the purchasing power of Gold stays intact over a long period of time. It’s better to keep your cash in the form of gold.
  • Less regulatory intervention: you don’t have elaborate disclosure norms for gold as it is for many other asset classes. Gold can be a very private investment.

Diwali is an auspicious time for buying Gold and it should be used wisely to invest. But there are many ways to invest and it can be a daunting task. Let us see the pros and cons of  the options you have:

Jewelry:  It is one of the oldest forms of investment which also has some amount of pride and honor attached in Indian families. It is something you can use and enjoy but at the same time it keeps appreciating in value. But the price of jewelry is usually marked by anywhere between 20 to 200% depending on the complexity of design. This makes it unattractive as an investment.

Gold bars and coins: Gold coins and bars are increasingly becoming popular not only as investments but also as gifts. But they have to be physically stored which can be a security nightmare. You might have to incur extra cost in renting a bank locker or insuring your possession. Moreover you have to be careful about adulterated and fake ones. There can be a substantial difference between buy and sell rate of gold coins and bars.

Electronically traded Funds: More popularly known as ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investor’s holding is denoted in units, which is listed on the stock exchange just like a share. It is expressed as NAV (Net Asset Value) which represents the price of one unit (equivalent to 1 gram gold) on that particular day.

These are many advantages of ETFs vis-à-vis physical gold when seen from an investment perspective:

a. No need to worry about the security and storage
b. No need to worry about quality of the gold
c. No need to worry about resale as the exchange provides comfortable liquidity (just like shares)
d. No making charges
e. You can invest very small amount of money (minimum 1 unit) which is not possible in case of jewelry and coins/bars.
f. No wealth tax. Long Term capital gains just after 1 year whereas it is 3 years in case of physical gold.

ETF is a tax smart investment as well.

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