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Different ways to invest in gold

18 Nov 2019

Gold is deemed to be precious as much as it is considered to be rare. It has high emotional, cultural and financial value for different people. Gold has become an essential part of the culture in India, and people consider buying gold on auspicious occasions such as weddings or religious festivals. India holds the tag of the most significant holders of gold in the world. According to WGC estimates, Indians hold nearly 25,000 tonnes of gold and Indian demand has averaged 838 tonnes over the last ten years. The value of this holding is roughly about 40% of India's nominal Gross Domestic Product (GDP) in FY19.

Over the years, it has been observed that gold has been a good store of value. Also, an investment in gold has given the best returns in the current volatile times. Jewellery is the primary driver of Indian demand, but consumption of bars and coins is also improving equally. India primarily imports physical gold in US Dollar (USD) terms which has a disadvantage of increasing the Current Account Deficit (CAD). The government wants to discourage physical buying of gold and promoting various non-physical schemes. Investors are also gradually shifting from physical gold to paper gold / E-gold but not in large quantities.

Let us discuss a few essential ways in which gold can be purchased and invested for the long term in both physical and paper form.

Physical Gold-

  • Jewellery - Indians certainly cherish possessing gold. Buying gold jewellery or coins is considered auspicious and lucky on the days of Dhanteras and Akshaya Tritiya. People buy jewellery made of diamond and gold to mark the wedding as the ‘most special occasion” of life. The making charges are akin to entry charges in an investment.
  • Gold Coins and Bars - Many people prefer to buy gold coins over jewellery as the former can be purchased in denominations as low as 0.5 grams. Recently, the government has launched national gold coins ahead of the festive season. Indians consider buying gold, albeit in small quantities, auspicious on specific days such as Dhanteras and Akshaya Tritiya. Gold coins are available from 0.5 grams to 50 grams, and people can buy gold coins through online platforms such as Flipkart, Amazon, Tanishq, etc. Many futures exchanges also facilitate physical delivery of gold. However, possessing of gold coins has certain drawbacks like high cost and safety.

Paper Gold-

Prices of paper gold products are derived from physical gold and in some way, are linked to physical gold. Some popular forms of paper gold formats are:- Unallocated or pooled gold accounts, Gold mining company shares, Exchange Traded Fund’s (ETF’s), Gold futures, Gold Options and Contracts for Difference (CFD’s).

A few of the most popular forms of paper gold in India are mentioned below –

  • Gold Exchange-Traded Funds (ETF) - These are simple investment products that combine the flexibility of stock investments and the simplicity of gold investments. ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices. Gold ETFs are passive investment instruments that are based on gold prices and invest in gold bullion. Because of their direct gold pricing, there is complete transparency on the holdings of an ETF. Further, due to their unique structure and creation mechanism, the ETFs have relatively lower expenses compared to physical gold investments.
  • Sovereign Gold Bonds (SGB) – The Sovereign Gold Bond Scheme was launched by the government in November 2015, under the Gold Monetization Scheme. Here, the issues are made open for subscription in tranches by the RBI in consultation with the Indian government. This is one of the best ways to own gold in paper form. By investing in SGB, one will not get physical gold but will participate in any rise (or a fall) in the price of gold. Investment in SGB’s is, therefore, purely for investment and not for consumption needs. In addition to price appreciation, there is a fixed interest of 2.50 per cent per annum on the investment, with no compounding of interest. The interest shall be paid in half-yearly rests, and the last one shall be payable on maturity along with the principal.
  • Gold Derivatives (Futures and Options) – Gold futures & options are popular among speculators. Gold futures are agreements to buy or sell gold at a specific date in the future at a particular price. Investors or traders can take positions by depositing margins with a broker and need to pay mark-to-the-market settled daily. Domestic bourses such as the Multi Commodity Exchange of India (MCX), Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) facilitate trading in futures and options contracts and physical delivery of gold in various quantities ranging from 1 gram to 1 kg. Delivery of futures contracts could happen, or the client may square off his / her position before the tender period, which in the case of gold, runs typically from the first to the fifth day of the contract expiry month.

There's no perfect way to own gold; each option comes with its inevitable trade-offs. You have the choice between physical gold vs paper gold in its many varied forms. There are many other factors that you need to consider before choosing one. Are you only speculating on the price of gold or silver going up? Or are you buying gold or silver with a view to wealth protection? Paper gold is a derivative of physical gold itself. The advantage of holding physical gold in your possession is that it bears no counter-party risks.

In whatsoever form you buy gold, it is best to buy in small amounts over time as buying a little at a time helps you get the benefits of rupee cost averaging. Although gold has been amongst the best performers over the long term, it is nevertheless a volatile asset class or investment; therefore, you shouldn't put a significant portion of your assets into it.

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