ALLURE FOR YELLOW METAL

From the ancient times Gold’s; the yellow metal, value had already been discovered. People took gold to make jewellery and currency, as a symbol of wealth, beauty and heritage which carried memories and traditions. This article explains how an Indian can invest in Gold.

Indian fascination with gold

Indians generally adore gold more than any other country, as it is the best possible protection against upheaval; both political and economic. In developing countries like India gold is still one of the most liquid and widely accepted forms of exchange and is the most efficient store of value that people posses. Historically Indians have invested in gold and apart from its monetary value gold also has a prestige value. Not to forget that no Indian bride, however poor, leaves her paternal home without at least a trinket of gold. And for the very rich, their bride is given enough gold to weigh her down. Marriages are finalized, annulled, postponed or solemnized on the transaction of gold. For some folks at the bottom of the economic pyramid ‘saving in the form of gold is still preferred.’ The reason is simple – due to under penetration of non debt financial instrument in India, gold is one instrument which is considered secure and returns worthily.

Should an Indian investor invest in gold?

Is gold a good investment? Is it worth investing in gold? Will gold give us good returns? The following are some of the plethora of questions that circulate in an investor’s mind when he/she is thinking about investing in gold. To answer this, let’s look at the prices of gold from 1991 till present, 2019. In 1991 gold was at Rs. 3400/- per 10 grams, and by 2001 the gold rates; Rs. 4300/- per10 grams, remained somewhat same. The figures indicate that there were not much growth between the decade; 1991-2001. Now take a look of gold rates from 2001-2011, the rates that were around Rs. 4300/- rose to Rs. 26,400/- per 10 grams, a growth by 6 times. Then from 2011 till present July 2019; gold is at Rs. 36,095/- per 10 grams. These figures convey that gold has a cyclic growth; i.e. for 10 years its prices may grow, and then for the next 10 years its prices may not grow, i.e. remain stagnant. Overall it can be inferred from these figures that gold prices have been on the rise, which gives us the question to our initial question ‘Is gold a good investment?’ – ‘that gold is a safe investment over long periods of time.’

Important reasons why investing in gold is good

Now knowing that gold is good investing; albeit long term, let’s look at the reasons why an investor should invest in gold in the first place. The reasons are as follows: first, history has proved it time after time that gold has performed relatively better compared to equities or other investment options in the scenarios of high inflation. Second, unlike investing in other equities investing in gold is lot easier and does not require big amount to get started. Third, gold provide high liquidity. Fourth, in order to reduce the portfolio risks, it is important to diversify investment, as gold help investors in diversifying the portfolio.

Following are the ways through which Indian investor can invest in gold

The core question is ‘how does an investor in gold?’ Traditionally, it was buying physical gold in the form of coins, bullion, artifacts or jewellery. Nowadays there are many advanced; including the old traditional, ways in which an investor can invest in gold. Here we will take each way, one at a time.

Physical gold

It is the traditional way. Apart from gold jewellery and ornament gold, coins and bullion can be bought in physical form as an investment. These are the purest form of gold; as long as the investor has a reliable jeweler, which can be sold back later or can be used for making jewellery. Gold coins are available in different size ranging from 1 gram to 50 grams. However, this being in physical form, securing them and storing them in a safe place is costly and a matter of concern.

Gold ETF

Gold ETF; exchange traded funds, is a non physical way of investing in gold, so an investor do not buy physical gold, but buys a gold backed exchange traded fund whose price moves according to the price of gold. It is in Demat from and is held in investors Demat account. Gold ETFs are managed by professional fund managers; they entail a management cost as well as brokerage, which reduce investor’s gains.

E-gold

E-gold is an electronic way to have a gold holding, and is kept in Demat form. Investors can exchange the Demat certificate for gold at anytime. Currently National Stock Exchange Limited in India offers E-gold. Investors can sell E-gold as well as take physical delivery of gold. E-gold generally gives better returns that Gold ETF in the long term as there are no annual management fees, as is in the case of Gold ETF. In case of E-gold there is a fear of loss and storage issues, if the investor takes physical delivery of gold.

Gold mutual funds

These bonds let the investor take exposure in securities or shares of companies, who are in the business of mining and production of gold. Gold mutual funds and Gold ETFs can have different returns as mining and production business performance may not exactly map to gold prices.

Gold fund of funds

Gold fund of funds basically invest in multiple ETFs. Through them an investor can buy these funds and indirectly invest in Gold ETFs. In this way investors do not need to maintain a Demat account to invest in ETFs. Investors would need to pay some management fee to the fund managers. In Gold fund of funds, an investor can use the SIP way of investing like in other funds.

Gold futures

Gold futures are the standardized financial contracts, wherein an investor agrees to take delivery of specific quantity of gold from the seller at an agreed upon price on a future delivery date. These Gold futures give investor a benefit to trade without having to pay the full amount up front. Compared to other gold investment options, gold futures are considerably risky, as the Gold future market can be volatile. On the contrary risk taken can reward the investor in the same proportion.

Sovereign gold bond

Sovereign gold bonds; SGB, are the safest from of gold investment as these bonds are issued by RBI; Reserve Bank of India, on behalf of the Indian Government. These bonds are traded on exchange, hence to invest in SGB, the investor needs to pay the issue price in cash to an authorized broker from SEBI. Interest of 2.5% per annum on the issue price is assured, and these will be credited to the investor’s bank account on half yearly basis. Returns will be based on the gold price. Sovereign gold bonds comes with 8 year tenure, however, investor can redeem after 5 years. This bond can also be used as collateral for loan.

Government of India does not want investor to sit on their gold

India is among the world’s leading consumers of gold, and its household gold holding is high, unfortunately, the country’s central bank, Reserve Bank of India, holds approximately only 500 tonnes of gold as reserves, which is much less than the total combined gold holdings of Indian households. One of the consequences of this high consumption of gold and high level of stickiness is that India is a significant net importer of gold, which adversely affect the Current Account Deficit; CAD. This makes it important for the Government to encourage savings and investments of gold and also bring back private stock of gold back into circulation to support economic activity – a key policy in this regard was the 2015 Government Monetization Scheme; GMS, by the Government of India. This policy is aimed at helping India control its deficit, while not coercively controlling its consumption of gold.

Gold and taxes

Income tax on selling of physical gold is based on whether it is short term or long term. If the gold is being sold within 3 years from the date of purchase then it is considered as short term, while gold sold after 3 years is considered as long term. Short term capital gains on the sale of gold is added to investor’s gross total income and taxed at the income tax rates applicable to the investor’s income slab. On the other hand, long term gains are taxed 20.8% including cess, with indexation benefit, i.e. adjust the purchase price of gold after factoring in inflation. Gains from sale of Gold ETFs and Gold mutual funds are taxed similar to that of physical gold on the units held. Capital gains arising from redemption of sovereign gold bonds have been exempted from tax. Also, indexation benefits is provided to long term capital gains arising to any person on transfer of bonds. And, taxation on digital form of gold is similar to the taxation of the physical form of gold or Gold ETFs or Gold mutual funds.

A reminder

Given gold is a long term investment option and is not suitable for earning short term gains; moreover the price of gold fluctuate in a cyclic manner, still an investor should invest in gold to hedge his/her investments in equities and bonds. Furthermore, gold comes in handy during situations of financial crisis. Lastly, it is better to remember that – ‘as long as there are increasing geopolitical and financial uncertainties in the world, gold prices will continue to rise.’

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