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Should You Still Invest In Gold?

| 11/29/2012 9:00 PM Thursday

While gold has traditionally been a favourite with buyers and investors, paper and e-gold are becoming preferred modes of buying the metal for investment purposes.

KEY POINTS:
  • There is a marked shift in the preference of urban buyers from jewellery to options like gold coins, bars as well as paper gold.
  • Buying paper gold is a simple, secure and tax efficient way to invest in gold. Gold ETFs, gold savings funds and e-gold are the ways in which investors can buy gold in the paper form.
  • Ease of transaction and facilitating purchase in small amounts are key advantages of investing in paper gold.

The demand for gold usually peaks during the festive season, and this year was no different. Although high gold prices as well as high inflation proved to be a dampener for the demand from rural India, buyers in urban centres remained undeterred by these factors. Besides, there was a marked shift in the preference of urban buyers from jewellery to options like gold coins, bars as well as paper gold.

Gold, as an asset class, has been performing well over the last 10 years. However, many investors are wondering whether it makes sense to invest in the yellow metal at the current levels. The contrasting views on its prospects going forward have been adding to their dilemma.

While the past performance of an asset class is a key parameter, relying on this factor alone can backfire. This can result in either over-exposure or under-exposure to an asset class, depending on how well or badly it has been performing in the recent past. Therefore, investors must also consider factors like its contribution to their asset allocation as well as its ability to hedge inflation over time. Besides, due importance should be given to the level of liquidity, flexibility and tax efficiency of the mode chosen to invest in that asset class.

There is definitely a case for having gold as an integral part of one’s portfolio, as it has a negative correlation with the other preferred asset classes. Moreover, the sources of demand for gold are far more diverse. A wide range of buyers like the jewellery sector, financial institutions, manufacturers of industrial products as well as various investment channels including coins and bars, gold ETFs and e-gold also make the liquidity risk very low. Besides, gold is both a commodity as well as a currency.

Another major advantage of investing in gold is that it does not carry a credit risk. Of course, one faces the risk of price fluctuations, but this can be tackled by investing systematically as well as by choosing the right way of investing in gold.
Most investors in our country buy gold in the physical form as its level of acceptance is very high. However, while buying jewellery for consumption is fine, it is always more prudent to opt for paper gold while buying it for investment purposes.
Remember, buying paper gold is a simple, secure and tax efficient way to invest in gold. There are broadly three ways of buying paper gold:

Gold ETFs
Gold ETFs (GETFs) are passively managed funds and are designed to provide returns that closely track the returns from physical gold in the spot market. An investor can buy and redeem units through the stock exchanges. GETFs offer many advantages like lower costs, sharing the cost of storage with other investors, transparency and facilitating the purchase of gold in small denominations. For example, the minimum lot for purchasing GETFs is one unit. Besides, investing in paper gold is more tax efficient as compared to investing in physical gold. Also, gold held in paper form is not liable for wealth tax.

Gold Savings Funds
These are open-ended fund of funds that invest in domestic GETFs. These funds allow investors to invest in gold ETFs of the same mutual fund without opening a demat account and without having to approach a stock broker. Besides, these funds also allow investors to invest systematically through SIPs in a more organised manner. Although one has to pay additional recurring expenses here as compared to GETFs, the overall cost would still be less if one considers other costs incurred with GETFs such as demat account maintenance charges, transaction charges and the brokerage to be paid while buying and selling gold.

E-Gold
Investors can purchase gold in the electronic form via e-gold, a product launched by the National Spot Exchange (NSEL). Investors in e-gold can buy and sell gold in denominations as small as one gram. A major advantage of e-gold is that investors have an option to convert paper gold into physical gold. However, it is not as tax efficient as Gold ETFs and Gold Savings Funds as one is required to remain invested for 36 months to claim long-term capital gains as against 12 months in the case of other options.

As is evident, gold is an asset class that has a lot to offer for an investor’s portfolio. Therefore, the issue is not whether you should have gold in your portfolio or not, but how much exposure you should have to it. While the thumb rule says it should be around 10 per cent of your portfolio, the actual exposure would depend upon the role you would like the metal to play in your portfolio. Needless to say, the key would be to have realistic expectations in term of the returns you receive from your investment.

Hemant Rustagi
CEO, Wiseinvest Advisors

 

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