There are many reasons why we shall look beyond conventional Fixed Deposits , PPF and high growth Shares and Mutual Funds. Gold is always seen as a thing to own and only for consuming as ornaments , for jewellery but seldom as an investment purpose , in fact silver also for that matter.
But now there are many reasons to invest in GOLD , just like people invest in Shares , Mutual funds , PPF , NSC and Fixed Deposits.
Reason 1: Stock Markets are becoming risky and uncertain
Stock Markets are in Bad shape for atleast short or medium term atleast. No one knows whats going to happen in 6 months or 1 year or 2 year. Long term may be good but still medium term perspective is not very clear.
Not only Stock Market , but whole of financial Markets are uncertain , if you consider problems like Inflation , dip in projected GDP growth of economy etc .
Reason 2 : It acts like hedge towards Inflation and Foreign currency
As Indian currency is gaining against Dollar and other currencies , Rupees is set to become more strong in coming years. Gold has inverse relation with Dollar.
http://news.goldseek.com/SpeculativeInvestor/1171382460.php
In future as Dollar weakens , GOLD will become more strong.
Reason 3 : Its a relatively less known investment option and has high potential in future
Looking at history , and every time we see that a investment option starts becoming popular and by the time most people know about it , it already gives most of its returns and becomes a talk of past.
GOLD has started gaining attention as investment option and becoming popular and still in its middle stage , if not early.
So its the time to ride the boat.
Reason 4 : Future High Demand and less supply
In future gold is going to in high demand and its already in less supply , so according to the demand-supply logic the prices are bound to go up in near future. Indians account for 23% of world’s total annual consumption and overall global demand has increased 15% Year on year
Gold demands were on all time high in 2007 and expected to increase in coming years due to mismatch in demand and supply.
Reason 5 : More Diversification
Before some time back , diversification of portfolio was limited to Equity , Debt and Real Estate and some cash , so that your risk is spread across different class of assets. GOLD has evolved as another asset class and not it help in diversifying your portfolio.
Whats the Best way to invest in GOLD ?
It really depends on person and situation and the motive of investment.
One can invest in GOLD directly by buying gold in physical form like jewellery , gold biscuits , gold bars. It all of these require some maintenance and some problems are associated with investing in physical format like :
- No surety of purity , you can be sure that you got the same purity as promised
- Preserving cost : if you have physical gold , you will invest in bank locker etc
for secure storage.
- Risk of theft , mishandling etc
To avoid all these problems , we have an alternate way of investing in GOLD , called Gold ETF’s , read it next …
Read about Gold Funds (Click here)
What are GOLD ETF’s
Gold ETF’s are special type of ETF’s (Exchange traded funds) , ETF are not covered here , but view them as open ended mutual funds , which are traded on stock exchange just like normal stocks. You can buy units on Stock Exchange , each unit is equivalent to one gram of gold or .5 grams of gold.
So if you want to invest in 100 grams of gold , you can buy 100 units of a GOLD ETF from stock exchange , you can buy it just like any share from stock exchange.
gold ETF’s price changes real time , as they are traded on stock exchange like shares.
In India currently there are Five Gold ETF’s.
- Benchmark Gold ETF (Stock Code on NSE/BSE : GOLDEX ) (the first one in country)
- UTI Gold ETF (Stock Code on NSE/BSE : UTGOLD )
and other 3 from Reliance , Quantum and Kotak listed on NSE.
Gold has returned 38% in last 1 year and 170% in last 5 years (absolute). And it looks great in future.
You can easily enter and exit from GOLD ETF’s unlike physical gold.
How investing in Gold ETF’s scores over Physical gold like Bars or jewellery ?
Comparison of GOLD ETF’s vs GOLD BARS vs Jewellery
Consider you are investing Rs 1 Lacs in Gold , there are 4 parameters to judge.
If you purchase Them
- Jewellery : Making charges of 15-20%
- Gold Bar : 10% to 20% mark up charges by banks.
- Gold ETF: 1.5-2.5% entry load
If you Sell
- Jewellery : 10% – 20% is lost due to Purity issues
- Gold Bar : Banks do not take it back , so premium paid at time of purchase is written off.
- Gold ETF : Brokerage of 1% or even less
Maintenance Charges
- Jewellery : Insurance charges and locker charges (if you put it in locker)
- Gold Bar : Insurance charges and locker charges (if you put it in locker)
- Gold ETF : 1.5 – 2.5 %
- Jewellery : Long term capital gain of 20% , but after 3 years. 1% wealth tax
- Gold Bar : Long term capital gain of 20% , but after 3 years. 1% wealth tax
- Gold ETF : Long term Capital tax of 20% , but after 1 year. No wealth tax
Note : Gold is taxed at 30% if held for less than 1 year in any format.
So on all these 4 scenarios , GOLD ETF’s score heavily over other means of investing in GOLD.
Read about Gold Funds , another article on Gold Investing , Click Here
To read more on why gold is a must buy now and how silver is much better than gold , read http://silverstockreport.com/
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
{ 18 comments… read them below or add one }
Indians account for 9% (not 23%) of the worlds total gold consumption.
Hi m.sidharth , as fas as i can find out , i see more than 20% . if not 235 , but definately not 9% .
http://goldnews.bullionvault.com/india_gold_jewelry_gems_diamonds_industry_120620073
you are right. I should have been a little careful in reading your sentence and more elaborate while explaining mine. I was talking consumption in the form of Gold stocks. India has 9% share in Gold stocks and 13% in the form of physical gold, which comes to 20 to 23% consumption in all forms.
Thanks for the correction.
Dear Manish
i know that this post is old, but i wanted some clarifications on the same subject. hope you can read this msg.
my background:
i am looking to buy Gold for my daughter's future marriage in distant future, was looking to buy GOld ETF from icicidirect because
1. i do not have a locker
2. did not want to make monthly trips dealers ( even to reputed shops like png, tanishq to buy gold)
3. i am doing monthly SIP in MF and stocks and i know the advantages of monthly buying)
what is coming out from discussion from some sites is that if you buy gold etf for 20 years, because of the expense ratio and annual charges, the actual money you could get after 20 years is only 72 % of the total paid. is this correct ?
assuming that you buy one gram of gold each month and after 20 years and 240 grams of gold, when you sell it at end of 20 years, the expence and annual charges ( say 2.5 % ) will eat almost 18 % of your gold ?
is this true ??
i am not able to understand how this will happen.
looking forward to your reply
regards
harrypotter
@harrypotter
Considering you want to buy it for future , it will obviously not make sense to go for physical gold. At the end you actually want to have money in invested in GOLD and not "own gold" . You either buy gold and it appreciates in future OR , you invest money in something and it increases in future and then you buy gold , both the options are same
Considering that there are many years for this , Dont put much into gold. Invest in Equity for long and later buy GOLD when you need it .
Dont put more than 10% of your money in GOLD .
The expeses and charges in case of GOLD ETF are around 1% , its not 2.5% .
The calculations which you have mentioned are only applicable if prices are stagnant and do not move, which will not happen , SO those calculations are rubbish ,. just forget it .
At the end , Put money in long term mutual funds and use the proceeds later to buy GOLD when you need it . You can have 10% money in Gold ETF .
Manish
dear Manish
thanks very much for the reply.
i also forgot to add that this gold SIP plan is specifically for daughter's marriage so that i have enough gold during her marriage. i have other SIPs for other requirements.
from your reply, you agree that almost 18 % of my investments will be eaten away by expense ratio and annual charges. so why would one continue to go for Gold ETF ?
can you show how this could come out too be.
i did talk to the MF guy at benchmark last week. they say that the expense is 1% expense weekly and around 1 % expense yearly
both are divided by 7 and 365 days respectivelty, my calculations says the difference ( in case of 5 % increase each year) comes to around 1200 in 20 years.
plz explain
regards
harrypotter
1. SIP is not applicable to Gold ETF
2. Expense ratio is applicable to any Mutual funds but in case of exchange traded funds expense ratio is less. Now Most of the ETFs exchange ratio is 1%.
If you are investing for 20 years, yes considering every year 1%. 20* 1 = 20% will be annual expense ratio to the AMC.
20% looks huge number if your money remains stagnant, but over such a long period GOLD will appreciate for many reasons.
See the gold price history over 100 years.
To avoid this even if you purchase physical gold also, making changes, locker charges, theft, liquidity and other issues are associated with it.
Dollar and Gold is inversely proportional to each other. Looking at the current and future trend, Dollar is set to weaken because of other emerging countries and gold is a good asset.
Latest results from Gold ETF data suggest Gold ETFs are becoming more attractive investment option.
Gold may not deliver best returns but it must be a part of your portfolio for better diversification.
Do not investment more than 10% of your income in gold, Try Equity diversified Mutual funds for longer tenure.
Whenever you need physical gold that time you can sell gold ETF and purchase gold.
Though it is difficult to time the market. but some hint would be
1. Buy when demand is less, gold prices fall….this is normally in No-marriage & No festival season
harrypotter
not 18% , it will just be 1% . Its 1% every year .. so anyways at the end also it would be 1% of the total amount .the extra cost would be more in physical gold and not in gold ETF .
manish
Guys,
One more point which can be v v imp in the long run. There are serious allegations on various gold etf’s & custodians like GLD across the globe of using very high leverage for gold holdings.
I was going through the fact sheet of SBI GETS & UTI GOLD FUND. Susprisingly all indian ETF are using Bank of Nova Scotia as the custodian for Gold. If you just try to find out the repute of this custodian in financial blogosphere by typing ‘Bank of Nova Scotia is the custodian for Gold’ in google search, you will get to know the kinds of risks involved in GOLD ETF’s – mainly technical risk (its a technical default if gold is not held in reality).
So as they say Let the buyer beware
Since most indian families usually keep atleast one locker, i would suggest its better to buy physical 100gms /coins from a reputed jeweller with bill. Its also more easy at the time of selling if bought frm a jeweller than buying coins frm bank also its costs less.
Regards
Rahul
Rahul
Thanks for this information ,have indian Gold etf’s faced any issues so far ?
Manish
VVI point for consideration. While physical gold may carry costs of it’s protection, a promise to deliver gold (especially when the bank is using high leverage) carries inherent risk.
ETF may be handy, but there is a risk that it can become a worthless piece of paper if the custodian goes bust.. And I am pretty sure there is enough in the fine-prints for them to get away easily.
I personally do not make my choice not with the herd.
Ashutosh
Good point . WIll try to cover this important point in some article .
Manish
nice article
would help lots seeking to invest in gold.
still i’d prefer normal stocks.
altho’ for the sake of diversification max 10-15% can be in gold (ETF).
Cheers!
Jo
yea .. max 15% in gold . I would say keep 10% only considering the current situation
Manish
Hi Manish,
This is my first post. I have been following your blog for sometime, it is really great.
With reference to Gold EFT , I have following observation. For NRI’s there is restriction on investing in GOLD EFT already listed in Stock exchange. They are allowed to invest only in NFO stage. Hence Gold EFT might not be viable option for NRI’s. Buying physical gold might be the only option then.
Regards,
Akbar
Really ?
I dont think so . Where did you read that NRI cant invest in Gold ETF on regular basis ?
Manish
Manish,
Are you contradicting your own article by the new article you have just written ??
http://www.jagoinvestor.com/2010/07/is-gold-worth-buying-a-shocking-study.html
I am interested to know your final views now !
Kunal.
Kunal
Yes , thats a 2 yrs old article , and apart from saying why you should invest in Gold , it also tells you various ways to invest in gold . So not everything holds from there .
Manish
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