Gold: An Investment Option

In just a span of two years we have seen the prices of gold more than double from around 6000 levels in early 2006 to more than 12,000 recently. There has always been a good demand for gold in India making it the largest consumer of gold in the world. Gold has been popular in India because it acted as a good hedge against inflation.

Not many people know that there are various investment options in gold like gold bars, numismatic coins, and gold accumulation plans by banks and financial institutions, and gold mutual funds.

Traditionally, the only option available to buy gold was in the physical form – whether as jewellery or as bars/coins. But now there are alternatives of buying gold in the demat form using 'Gold Exchange Traded Funds'.

Studies conducted by Security Exchange Board of India (SEBI) reveal that gold has been the second most preferred option among the Indian public after deposits in banks. An increased pace of liberalization measures in India will account for many new options to emerge to invest in gold bars, gold coins, gold funds and gold options.

Gold can’t be printed like a banknote can so it’s finite in supply. It has to be mined from the ground and that’s why it will always be used as a store of value. In short its attraction is its rarity value.

In case gold is being bought purely for investment purposes, then Gold ETF scores over Physical gold.

* Low cost: When you buy Gold ETF you have to pay only the brokerage charges, which is usually around 0.5%. Vis-à-vis this, you may have to shell out anything between 10 to 20% as premium and/or making charges if you buy physical gold. To store physical gold, you have to incur locker/insurance charges, while in ETFs one pays the annual fund management charges of 0.5-1%. Though physical gold kept at home with no insurance can save annual costs, it is quite risky.
* Transparency: For ETFs, the rates are quite transparent as they are linked to the international prices. But there is no commonality in prices of gold across various jewellers/banks even within the same city.
* Purity: You need not be concerned about the purity of gold in Gold ETF.
* Security: No one can steal your Gold ETF units.
* Capital Gains Tax: In case of physical gold the LTCG tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs.
* Wealth Tax: Physical gold attracts Wealth Tax whereas Gold ETF is exempt from Wealth Tax
* Convenience: Just call up your broker and your job is done. You don’t need to visit the nearest jeweller with loads of cash.

Gold is essentially a game of demand and supply. And it is not easy to predict the demand-supply scenario because of multiple factors – both national and international - affecting it. But if we look at the past 15-20 years’ record, it is seen that Gold is a hedge against inflation.

In 1996, gold price was near to Rs. 5,700 per 10 gm and in year 2001, it was near to Rs. 4,400 nearly 25-30% depreciation but after that period, it has not seen those bad days and have quite a good future ahead.

Inflation will have no impact on the price of gold, other factors remaining the same thereby lending support to your wealth. In fact, in times of inflation, more money tends to move to gold, thereby driving up its price. In other words when the stock market crashes or when the dollar weakens, gold continues to be a safe haven investment because gold prices rise in such circumstances.

It could be said that one may invest a small portion of one’s corpus in gold as a means of portfolio diversification. But one should not expect high returns.


References:
www.moneycontrol.com
www.sify.com
www.rediff.com