Investment in Gold - Part 4 of 4

This is the last of the 4 part series about ‘Investment in Gold’

e-Gold

• One of the most interesting investment cum consumption method of investing in Gold and picks the best aspects of all the previous investment methods

• Buy gold in minimum units of 1 (no fractional ownership) at prevailing market price - [similar to Gold ETF]

• Demat account to hold e-Gold is different from the one use for Gold ETFs / stocks – [no hassles of holding gold in lockers]

• Gold is of 995 grade (the highest grade in gold) – [purity is guaranteed]

• Brokerage is lower or equal to the brokerage as in gold ETFs – [overall transaction costs are lower]

• Your gold is held in a warehouse managed by the National Spot Exchange (view it as the gold in a very large locker) but you hold it in demat form - [safety, from a perspective of storage, as good as Gold ETFs]

• You can either sell gold and book profits (like you sell stocks / Gold Mutual Funds / Gold ETFs) or take delivery of the gold in the form of coins or bars by paying applicable state VAT and handling charges - [ease of selling]

• Trading window is 10:00 am to 11:30 pm - [unlike Gold ETFs or Gold Mutual Funds]

• Flexibility of buying any amount of gold without the hassles of getting a locker

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares.

• Not all brokers who deal with equity are brokers in e-Gold

Gold Futures

• Started in India in 2004; comes under the category of commodity trading

• The most rewarding AND riskiest of all investment methods in gold

• Works like stock futures

• You trade (buy / sell) large amount (multiples of lot size) of gold in a single transaction

• Minimum lot size for a gold future contract is 1 kg

• Not all brokers who deal with equity are brokers in Gold futures

Risk Reward Ratio (in decreasing risk and return)

Gold Futures > e-Gold > Gold ETFs > Gold Mutual Funds

Please note, I do not consider gold under the consumption category for the risk-reward ratio.

Investment in Gold - Part 3 of 4

Gold Exchange Traded Funds (ETFs)

• Exchange Traded Funds are investments made by an asset management company to manage Gold as the underlying asset. They invest in physical gold.

• You buy Gold ETFs in units of 1 (no fractional units) through a broker as ETFs are traded like stocks and shares on stock exchanges.

• Price of 1 unit (approx. 1 gm) of gold ETF keeps changing similar to the price changes in a stock on a given trading day; except the price also moves in tandem to world gold prices. [Prices of a given stock changes based on the perception of the value (this in turn has its own set of variables) of the company, dynamics of demand and supply shares in the market].

• You need to pay a brokerage charge when you buy / sell the gold ETF.

• One needs a demat account (demat account for gold ETF is the same as that for shares)

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares.

• As the Gold ETF is management by an AMC, there's an additional expense of 1% pa.

• Physical gold is bought by the AMC and managed by authorized participants on behalf of the AMC.

• Gold ETFs were launched in India in 2007

• Well known Gold ETFs - BeES Gold ETF, UTI Gold ETF, Kotak Gold ETF

• Automatic SIP (Systematic Investment Plan) is not possible in Gold ETFs

Gold Mutual Funds

• The investment company (AMC) invests in either companies involved with the mining, refining, trading of gold or invests in Gold ETFs (Fund-of-Funds).

• AIG World Gold Fund and DSP BR World Gold Fund invests in companies which mine, refine gold ore

• Gold ‘Fund-of-Funds’ trend was started by Reliance in 2011 followed by Kotak Gold Savings Fund. Reliance Gold Savings mutual fund is a fund which invests money in Reliance Gold ETF. SBI's latest Gold mutual fund is again a Fund of Funds which invests in SBI’s Gold ETF.

• Any mutual fund which invests in another mutual fund gives a lower return and has higher costs.

• Reliance Gold ETF will give higher returns than Reliance Gold Mutual fund.

• No need for demat account to buy gold mutual funds

• For every amount you invest, you get units of the gold fund. Fractional units are possible when you invest through gold mutual funds

• Entry load / exit load and expense load (1.3%+ pa) as in any mutual fund is applicable

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares

• Automatic SIP (Systematic Investment Plan) is possible in Gold mutual funds

Investment in Gold - Part 2 of 4

Here’s Part 2 of 3 of the series 'Investment in Gold'.

Gold As Consumption

Bars & Coins:

• Typically in standard weights of 1 gm, 5 gm etc.

• Available from Banks, Jewelers, Gold Marts

• Purity is 24 carats or 22 carats

• Price is subjective to the prevalent rate of the day in the World Market indicated in dollars per troy ounce for 24 carat gold.

• Additional charges include die charges for marking and certification of purity

• 1 Troy Ounce is 31.1 gms

• Price of Gold in India for Gold is calculated by

o Value of USD in INR per Troy Ounce

o Convert the rate from previous point to get rate per gram for 24 carat gold

• Don't buy bars / coins from Banks as they charge a higher premium

• Don't buy 24 carat gold bars / coins. Jewelers prefer to buy back 22 carat gold

• Purity of gold only guaranteed by banks for coins / bars sold by them

• BIS standards exist; all purchases from a jeweler are based on trust / reputation of the jeweler

Jewelry:

• No standard weight for jewelry bought

• Costs include making charges, wastage charges and state VAT.

• Indians typically choose to buy 22 carat jewelry

• More complex the design, higher the wastage and making charges which increases your cost of acquisition

• Though BIS standards exist, all purchases from a jeweler are based on trust / reputation of the jeweler

Additional cost of keeping the above forms of gold in bank lockers. Gold sitting in lockers does not generate any intrinsic value (until price of gold increases).

In many a movies (and in real life), selling of the 'household' gold is the last resort to encash the value of gold.

In India, culturally, Gold is an asset handed over from a generation to another (mother to daughter, mother-in-law to daughter-in-law, etc). Gold is also part of tradition / custom of many castes / religions in India.

Gold is an asset which is traditionally a way of giving a girl's share in the family property.

Now NBFCs (Non Banking Financial Corporations) like Muthoot and Mannapuram offer loans against gold.

• Here the price of the gold is taken as the average of gold price over the last 90 days.

• Purity and total weight of gold are key factors to arrive at the amount of loan you can get.

• Loan sanctioned is 70% of the total value arrived based on the above 2 points

• Interest on this type of loan is between 14 – 16 % per annum

Investment in Gold - Part 1 of 4

Continuing from one of my previous mail threads about Gold, I’ll be sharing a 3 part series about investment in Gold. So here’s Part 1 of 3.

Gold prices are impacted by the following:

• Jewelry off take (pure consumption demand)

• Industrial use

• Geo-political concerns

• US dollar movement against other currencies

• Indian rupee movement against the US dollar

• Central Banks diversifying into bullion (Central Banks normally invest in bonds of other countries mostly US, Germany, France, Canada – AAA+ rating :-) )

• Central Bank Sales Slowing and Massive De-Hedging

• Gold Mine Production

• Fall in Supply

• Buying of gold can be broadly classified into 2 categories

o Consumption and

o Investment

• By world statistics, gold is mostly bought for consumption, investment and finally for industrial use

Gold for Consumption:

• Buying of gold is influenced with the intent to HOLD and NOT SELL

• Forms of buying gold is in jewelery, coins, bars

• Industrial Use

• Mostly bought my individuals and manufacturing companies in the hi-tech sector

Gold for Investment

• Buying of gold is influenced with the intent to SELL and NOT HOLD

• Forms of buying and selling of gold is Gold ETFs, Gold Mutual Funds

• Speculative buying in form or Gold Futures

• Mostly bought by investment management companies, central banks, speculators / traders and lastly by retail investors

Gold - Is it Worth to Buy Now?

Over the last few weeks gold has been creating new highs because everyone seems to think that gold is a safe investment class.

Dollar / Euro / Pound, etc are unsafe as their respective countries have economic problems.

But will there be a situation when you and I will buy petrol / vegetables in exchange for gold. Will we move back to a barter system? When countries have stopped using gold as standard for printing currency, how will investment in gold (by us or countries) help? When people and countries realize that, everyone will sell.

In India, people buy gold in jewellery form as it can be passed on to the next generation and hence not an investment class.

Surprisingly, (as per reports from the World Gold Council), in Q 2 of 2011, the demand in Gold ETFs (pure investment category) fell as compared to Q 2 of 2010. The increased demand for gold was by virtue of the increase in demand in gold jewellery. India and China accounted for 52% of global bar and coin investment and 55% of global jewellery demand.

So, if there’s a second recession, consumption for gold jewellery will fall and so will the prices. All it needs is India and China to grow slower than last year (these countries need not be in recession but slower growth will have its own impact).

Another fact, gold as an asset class gave positive returns in the decade 2001 – 2011; prior to which it was more or less stagnant. Prior to 2001, we have had economic crisis in other parts of the World and in India but gold never gave returns the way they have done in the last decade.

Buy stocks of strong companies. Keep investment in gold (as ETFs, jewellery, coins, bars, etc) to less than 5% of your portfolio.

Gold & Real Estate - Investment Options?

Many a times I have been asked whether gold is a good investment option. Similar questions are asked about real estate (empty land or built up area).

My response has been both yes and no.

Yes – as long as I am able to make a profit on an investment made in these items, they are an investment class. But so is any other commodity like Crude Oil, Silver, Steel, Rubber, Pepper.

No – as by and large, these commodities have no intrinsic value. These commodities are never sold at a cost price + proft margin. Their value is determined by the dynamics of demand (need to buy) to supply (need to sell).

In case of companies, there’s always a book value of the company, which is the fair value of the company per share. In commodities, there’s no fair value.

Investment in real estate, atleast in India, is fraught with risks many of us are oblivious about. As transaction value is large and so is the inherent risks, the reward (if all goes well) is also pretty high.

Also, if my neighbour’s property was sold at X, does not mean I will get X as a minimum. My property will valued when your ‘need to sell’ meets someone else’s ‘need to buy’. If I am in a crisis and my ‘need to sell’ is high, then Ill get a price lower than X.

Next Edition: Gold – Is it Worth to Buy Now?