Jagoinvestor

April 11, 2008

4 reasons why you should consider gold as an investment option for next 2 years

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 jewelry 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.

gold investment

Reason 1: Stock Markets are becoming risky and uncertain

Stock Markets are in Bad shape for at least short or medium-term at least. No one knows whats going to happen in 6 months or 1 year or 2 years. Long term may be good but still, a medium-term perspective is not very clear.

Not only the Stock Market but the 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 a hedge towards Inflation and Foreign currency

As the Indian currency is gaining against Dollar and other currencies, Rupees is set to become more strong in the coming years. Gold has an inverse relation with Dollar.

https://news.goldseek.com/SpeculativeInvestor/1171382460.php

In the 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 an 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 an investment option and becoming popular and still in its middle stage, if not early.

So it’s the time to ride the boat.

Reason 4: Future High Demand and less supply

In future gold is going to in high demand and it’s already in less supply, so according to the demand-supply logic, the prices are bound to go up in the near future. Indians account for 23% of the world’s total annual consumption and overall global demand has increased 15% year on year

Gold demands were an all-time high in 2007 and expected to increase in the 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.

What’s the best way to invest in GOLD?

It really depends on the person and situation and the motive of investment.

ne can invest in GOLD directly by buying gold in physical form like jewelry, gold biscuits, gold bars. It all of these require some maintenance and some problems are associated with investing in a 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 alternative way of investing in GOLD, called Gold ETF’s, read it next …

Read about Gold Funds (Click here)

What is GOLD ETF’s

Gold ETF’s are a 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 the stock exchange, you can buy it just like any share from the stock exchange.

gold ETF’s price changes real-time, as they are traded on the stock exchange like shares.

Watch this video to know why there will be an increase in gold investment in upcoming years:

In India currently, there are Five Gold ETF’s.

– Benchmark Gold ETF (Stock Code on NSE/BSE: GOLDEN) (the first one in the 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 the last 1 year and 170% in the last 5 years (absolute). And it looks great in the 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 Jewelry

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 the premium paid at the 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 the locker)
– Gold Bar: Insurance charges and locker charges (if you put it in locker)
– Gold ETF : 1.5 – 2.5 %

Tax Implications

– 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.

To read more on why gold is a must buy now and how silver is much better than gold, read https://silverstockreport.com/

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

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48 Comments
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Arunkanth
Arunkanth
10 years ago

Sorry for so many posts.

but found an interesting one here(map of NSE and icicidirect scrip codes)
http://www.intradayteam.com/2008/09/list-of-nse-scrip-codes-to-icici-direct.html

Arunkanth
Arunkanth
10 years ago

May be I shud have posted my above question in this link. you have already answered half my question there. so posted the link here for any one in future to refer

http://jagoinvestor.dev.diginnovators.site/2008/09/some-of-best-products-i-know-about-1.html

But why is the code different on icici direct

Arunkanth
Arunkanth
10 years ago

Hi Manish
Thanks for your posts on anything and everything related to M(Money)

This is the first thing I do (visist your site) when I buy any funds/policies/cards etc

I bought UTI Gold ETF. but now its price is not the same as other gold shares. I know we shudnt directly compare prices of different ETFs.

A month back all Gold ETFs NAVs are around 2800 to 2900
Now they are all around 2700 to 2800(100 rupess less as gold prices have fallen a bit)

But UTI NAV has fallen down from 2750 to 2500(250 rupees in one month)

How cud this happen? just in case you know!!

Also one small thing – on NSE it shows the script code as NSE:GOLDSHARE(for UTI Gold ETF). but you gave it as “UTGOLD”. Even icici direct shows it as “UTGOLD”. Are they same? iifl shows it as GOLDSHARE. whats the difference?

VIJI
VIJI
12 years ago

DEAR MANISHJI.,
YOUR ARTICLES /REPLY /VIEW POINTS ARE SIMPLY SUPERB.., UNMATCHED.., CLASS OF ITS OWN..,
PLEASE DIFFERENTIATE & GIVE FAIR SUGGESTION /OPINION FOR THE RETURN , SAFETY ,& MARKET CONDITIONS / SPECULATORS (GLOBAL & DOMESTIC) etc., FOR THE BELOW.., AS NOW A DAYS EVERYONE TALKS OF GOLD,GOLD,GOLD…..,
– GOLD (PHYSICAL )
–GOLD SCHEME
–GOLD FUND –GOLD SAVING FUND !!
–GOLD ETF & Bk.of NOVA SCOTIA
–GOLD MUTUAL FUND
–ANY OTHER RELATED WITH GOLD
THANKS & AWAITING YOUR SOLID VIEWS.,
Regards

P.S:- FORGOT TO ADD –DERIVATIVE MARKET(COMMODITY FUTURES
–SILVER & PLATINUM etc., IN PLACE /EXCHANGE OF GOLD IN ANY FORM MENTIONED ABOVE ..
THANKS

Rani
Rani
12 years ago

I got convinced looking at the article that ETF are better, but after the discussions, I am again in the same old confusion state. “Physical gold is better or ETF Gold?”
I only am looking with a view of saving so that I can maximise the value of it as days pass by.

VIJI
VIJI
Reply to  Jagoinvestor
12 years ago

DEAR MANISHJI.,
YOUR ARTICLES /REPLY /VIEW POINTS ARE SIMPLY SUPERB.., UNMATCHED.., CLASS OF ITS OWN..,
PLEASE DIFFERENTIATE & GIVE FAIR SUGGESTION /OPINION FOR THE RETURN , SAFETY ,& MARKET CONDITIONS / SPECULATORS (GLOBAL & DOMESTIC) etc., FOR THE BELOW.., AS NOW A DAYS EVERYONE TALKS OF GOLD,GOLD,GOLD…..,
— GOLD (PHYSICAL )
–GOLD SCHEME
–GOLD FUND –GOLD SAVING FUND !!
–GOLD ETF & Bk.of NOVA SCOTIA
–GOLD MUTUAL FUND
–ANY OTHER RELATED WITH GOLD
THANKS & AWAITING YOUR SOLID VIEWS.,
Regards

swati
swati
12 years ago

hiee

need your guidance…i am getting married next year and havent bought any gold yet..as the gold price have gone down right now..do u suggest to buy 24kt gold bar or 22kt coins…am not sure if i want to buy jewellery yet as fashion trends change.i am nri so not interested in the gold etf as it will take some time to arrange for it.
thank you

Saurav Sinha
Saurav Sinha
13 years ago

Hi Manish,
I was checking out the Risk & Volatality aspect of all the GOLD ETFs operative in India, there is 1 parameter called “Sharpe Ratio” which I dont have any clue about. Can U help??

Raj
Raj
13 years ago

Hi Manish,

Are there any restrictions for NRI’s to invest in ETF’s. I recently opened a Demat account and tried to buy SBI Gold ETF’s couple of days back and got rejected saying NRI’s couldn’t invest on this ETF.

Your advise would be appreciated. Thanks

Raj

Nitin Shah
Nitin Shah
13 years ago

I am in USA. Iwant to open .gold EIF”S in India. wherw &how I open?

Shibaji Dash
Shibaji Dash
13 years ago

At least you have set investors thinking on gold etf. You have at the same time raised a valid alert. Why bank of Novascotia as the custodian? Will you pl enlighten us in the matter? In today’s world after many many scams qustion haunts the mind: who will be the cusodian of the custodian? Like who will watch the watchman? Or, the fence eating the crops! Shibaji Dash.

neet
neet
13 years ago

Hi Manish,

How does one invest in silver as a retail investor?

Rgds

Balbir
Balbir
13 years ago

Hi Manish,

I have just started learning with the help of your blog, so always have some questions. Call me a paranoid 🙂

All I have a piece of paper as a certificate which says I bough 1 gm of gold but I do not have physical gold. There should be someone who is keeping my gold and when I need I can sell it. So then other person will buy my certificate/paper (not physical gold)

What if the custodian who keeps the gold has 100gm gold and issued 200 certificate. I am not doing any background verification of the company in terms of their liability, reputation and fair practices 🙂

Just wanted to be ensure that my money(gold) with what ever the current market value is secure and exists in physical form 🙂

Thank you,
Balbir

Balbir
Balbir
13 years ago

I am buying 1gm(1 equity) of goldbees per month in NSE exchange, I am wondering who is the custodian of goldbees 🙂

what if they goes bankrupt? 🙂

Kunal
Kunal
13 years ago

Manish,

Are you contradicting your own article by the new article you have just written ??
http://jagoinvestor.dev.diginnovators.site/2010/07/is-gold-worth-buying-a-shocking-study.html

I am interested to know your final views now !

Kunal.

Akbar
Akbar
13 years ago

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

Dinesh
Dinesh
Reply to  Jagoinvestor
13 years ago

I also noticed that I am not able to buy GOLD ETFs from my ICICI direct NRI account. It marks that not available for NRIs.
It’s weird ?

Jo
Jo
14 years ago

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!

trackback
Gold prices touches all time high
14 years ago

[…] Future Prices : One should not try to time the prices in future , however its expected to slow down in future after wedding season is over . Buy on corrections only .  Read more on GOLD ETF’s […]

trackback
Great tips in Personal Finance
14 years ago

[…] Jewellery , But the underlying reason always is capital appreciation . So why not always invest in Gold ETF’s [ Understand what is ETF ] and whenever you need Physical gold , sell the ETF’s , take the […]

Rahul
Rahul
14 years ago

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

Ashutosh Sinha
Ashutosh Sinha
Reply to  Rahul
14 years ago

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.

Anonymous
Anonymous
14 years ago

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

Srinivas
Srinivas
Reply to  Anonymous
14 years ago

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