Investing in Gold

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1. Gold is a precious metal and there is a tendency to hold gold as a store of wealth since ancient time. It is also used to make ornaments and jewelleries. Peoples are buying gold because of the following reasons.

(i) Gold is hold by the people because of its durability and malleability.

(ii) It is used for making ornaments and jewelleries. 

(iii) Gold is hold by the people to hedge against inflation as well as deflation. 

(iv) Gold provides a financial cover during geopolitical and macroeconomic uncertainty. 

(v) Gold is treated as crisis commodity because in times of geopolitical uncertainty it outperforms other investment and people can flee to its relative safer place during the rise of global tension. 

Price of 24 carats gold in India during the year 2001 was approximately Rs. 430.00 per gram which increased to Rs.2640.00 per gram during the year 2011. Its annualised yield comes out to be 19.89 percent. During the year 2021 its price was Rs.4872.00 per gram giving an annualised yield of 12.90 percent over a period of 20 years which not only beat inflation but also beat the maximum interest rate of term deposits in India. Therefore, one can think of including gold in one's portfolio. 

2.  No doubt investment in gold is good. But while purchasing gold ornaments one needed to take the following precautions.

(i)  Please ensure the purity of gold in the ornaments which you are buying. Purity of gold is determined by carats. A 24 carats gold is considered to be 99.9% pure and its purity get reduced with decline in the number of carats i.e., purity of 22 kt gold is less than 24 carats gold.

(ii) Hallmark certify the purity of gold and therefore it is advisable to buy hallmarked jewellery. 

(iii) Please check the actual weight of gold that you are buying and it should be exclusive of used stones in ornaments. 

(iv) Please check and compare the price of gold before buying and buy gold ornaments from a trusted jeweller or branded jewellery shops. 

3. Disadvantages of investing in physical gold.

(i) Price of ornaments and jewelleries include making charge which ranges between Rs.30 and Rs.60 per gram and also GST amount which you are paying at the time of purchase of gold from jewellery shop. But at the time of selling ornaments, you are paid only the price of gold (exclusive of making charge and GST) at the prevailing market rate by the shroff or jewellers. 

(ii) While selling gold to jewellers they reduce the weight of metal alloy and other impurities in the ornament to arrive at the actual weight of gold and you are paid accordingly based on actual weight of gold in the ornament at the prevailing market price of gold at the time of selling.

(iii)  You will not get any value for gold jewelleries if it is lost or stolen. You have to keep it in safe custody. You may have to hire bank's locker for safe keeping of your jewelleries for which you may have to pay annual rent depending on the size of locker.

It is better to limit the holding of physical gold because of the above risks. Is there any other way for investing in gold to minimise the risks associated with holding physical gold?  Yes, instead of holding gold in physical form you can hold it in paper form or electronic form. Government of India launched Sovereign Gold Bond Scheme in November 2015 under Gold Monetisation Scheme. Since then, several tranches of Sovereign Gold Bond Scheme have been issued. Sovereign Gold Bond Scheme has been explained in detail in the following paragraph.  

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4. Sovereign Gold Bond Scheme:  

Under Sovereign Gold Bond Scheme, the issues are made open for subscription in tranches by Reserve Bank of India (RBI) in consultation with Government of India (GOI). The Bonds are in denominations of one gram of gold or its multiple thereof. An individual person resident in India can make minimum investment of one gram and maximum of four kilogram of gold per fiscal year in such Bonds. The tenure of the Bond is 8 years with the exit option in 5th, 6th, and 7th year to be exercised on the interest payment dates. The price of the Bond is fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association (IBJA) for the last 3 business days of the week preceding the subscription period. The redemption price will be based on simple average of closing price of gold of 999 purity of previous 3 working days published by IBJA. The interest is paid to the investors at a fixed rate of 2.5% per annum payable semi-annually on the nominal value of the bond. The interest is taxable but the capital gains tax arising on redemption of these bonds to an individual is exempted. The indexation benefit is available for the long-term capital gains arising to any person on transfer of bond.   

5. Gold Exchange-Traded Funds i.e., Gold ETF:  Gold ETFs are kind of mutual funds that are listed and traded on Exchange and can be hold in Demat form.  One unit of Gold ETF is equivalent to one gram of 24 carats gold. Axis Gold ETF, Kotak Gold ETF, HDFC Gold Exchange Traded Fund, ICICI Prudential Gold ETF, etc. are few Gold ETF Funds in India for investment. Most of the Gold ETFs are open ended. Gold ETFs are having the following advantages over physical Gold and Sovereign Gold Bonds.

Advantages of making investment in Gold ETF:

(i) Pricing of Gold ETF is closer to the actual market price of Gold compared to physical gold as it is devoid of any premium resulting from the making charges, GST, alloys and impurities contained in physical form of Gold i.e., gold jewelleries. 

(ii) Sovereign Gold Bonds are available to investors for investment when the issues are made open for subscriptions. But Gold ETFs are always available for investments. 

(iii) Gold ETFs are having more liquidity as compared to Sovereign Gold Bonds (SGBs) as it can be traded in open market at the free will of the investors and it does not have any lock-in period. But there is a lock-in period of five years for SGBs. 

(iv) Unlike SGBs, investors can remain invested in Gold ETFs as long as they feel like. 

(v) Unlike SGBs there is no upper limit for investment in Gold ETFs. 

(vi) Unlike Physical Gold, there is no scope for loss of value due to theft as Gold ETFs are hold in Demat form.

Disadvantages of making investment in Gold ETF: Gold ETFs are having the following disadvantages over physical Gold and Sovereign Gold Bonds.

(i) Capital Gains on selling of Gold ETFs are taxable. Long term capital Gains are taxed with indexation benefit while short term capital gains are taxed based on the tax slab of the investors. While Capital Gains arising on selling of Sovereign Gold Bonds are exempted from the payment of income tax. 

(ii) Unlike SGBs, there is no interest payment to investors. Return on redemption of Gold ETFs are subject to market risks.

(iii) Unlike SGBs, investment in Gold ETFs include Fund Management Charge, brokerage at the time of both purchase and sell of ETFs and administrative charges.

6. Conclusion: No doubt that the returns on investment in Gold is comparatively higher than that of debt instruments if hold for longer period i.e., at least 10 years. But our investment portfolio should not contain substantial investment in Gold. Investment in Gold should be limited to 10 percent of our total investment portfolio. Our investment in Gold should consist of physical gold, SGBs and Gold ETFs of which investment in physical Gold should be bare minimum. One can make investment in Gold ETFs through systematic investment plan (SIP). 

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