SMART TIPS ON GOLD INVESTMENT
· Gold appeals both to optimistic and pessimistic investors.
· It can add true diversification to a portfolio of stocks (which typically only attract optimistic investors).
· When markets are volatile and investors panic, they tend to move out of risky assets, such as stocks, and invest in safer assets such as gold.
A. Gold jewellery
· Go for it if you want to start using the ornaments immediately or give them as a gift.
· If the ornaments are needed after 10-15 years, accumulate gold in paper form and then liquidate the holdings at the targeted time to buy gold jewellery.
· This will overcome fashion changes with time, and also save you from high making charges, tax implications and impurity issues when exchanging your existing jewellery at that time.
· Avoid savings schemes of gold jewelers, considering the several inherent risks involved in them.
B. Gold bars, coins, biscuits
· Go for them if you don’t have any faith in paper gold and want to purchase only physical gold.
· Buy bars and coins from a reputed jeweler, who will buy them back when you need the money.
C. Paper gold
1. Gold Exchange Traded Funds
· Go for them if you already have a stock market trading account and a demat account.
· You can use the same infrastructure to invest in gold in this paper form.
· Focus on gold ETFs which have consistently high trading volumes and a low expense ratio.
· Avoid gold ETFs that hold large amounts in cash, because they will not reflect true gold prices.
2. Gold Fund Of Funds
· Go for them if you do not have a demat or trading account and don’t wish to invest a lump sum.
· However, the charges in these funds are marginally higher as annual expense.
· Also, a gold FOF has to take care of two tracking errors which could weigh down the returns.
· In case the return on physical gold is negative, the returns from gold FOFs would be even lower.
3. E-gold
· Go for e-gold if you are buying a large quantity as it needs a separate demat account.
· Small investors, who intend to buy 10-20 gm, will not benefit from it.
4. Gold futures
· Go for them if you already have gold in physical or demat form, as they are meant for hedging.
· Futures are for sophisticated investors who use them for hedging exposures.
· The retail investors, who want to buy gold for the long term, should avoid this risky path.
5. Shares of gold mining companies
· Go for them if you understand that their prices and gold prices don’t always move together.
· Flooding of gold mines may push gold prices up but may send the miner's stocks reeling.
6. Shares of gold jewel companies
· Go for them if you understand raw material and operational costs, margins and retail marketing.
· The government’s fiscal decisions also play a key role in the fate of these companies.
D. Advantages of paper gold over physical gold
1. Affordability
· It can be bought in small denominations of 500 mg/1 gram, which is not possible in physical gold.
· As paper gold is in demat form, costs of buying, holding and selling are also lower.
2. Liquidity
· Buying and selling paper gold is very fast through on-line trading or a phone call to the broker.
· Gold ETF units are freely-traded on stock exchanges at any time during trading hours.
· You can, therefore, encash them at short notice and without having to deal with a jeweler.
3. Purity
· Fund houses of gold ETF units are required to hold gold bullion of 99.5% purity.
· In physical gold, however, the buyer has to ensure that he gets the purity he has paid for.
4. Safety
· Physical gold can be stolen and, therefore, needs to be stored in a locker.
· Gold ETF and e-gold units are held electronically in the demat form.
· Gold FOFs can be either in the demat form or held with the custodian.
5. Transparency
· The price of paper gold is completely transparent on a real time basis.
· There are no making charges or premiums involved, except a small brokerage.
6. Conversion
· E-gold and gold ETF units can be converted into physical gold by re-materialization.