Sunday , 25 June 2017

Buying Gold

Buying Gold? We tell you the best mode
INDIAN’S love for gold is legendary. According to research data, Indian households have amassed over 16,000 tonnes of gold in the form of jewelry. The value of this as per market price is Rs 27.2 lakh crores (USD591 billion). That is close to twice the foreign exchange reserves held by the RBI.

Forms of buying gold

1. Jewelry
Jewelry is the most traditional and the dominant form of buying gold in India. However, they do not buy it for investing reasons. The reason: there are heavy losses in the form of wastage and making charges. This can vary from a minimum of 10 per cent to as high as 35 per cent for special and complex designs.

2Bank coins        
It’s not an investment idea as the premium that banks charge for their coins is anywhere between 5 and 10 per cent. The bank coins have lesser liquidity as they are not bought back by the banks.

3World Gold Council coins
These are coins issued by jewelers who are part of the WGC network. They have lesser premium over the market price (1 to 2 per cent) and are redeemed at the market price when one takes them for selling off.

4Bullion bars
These are good modes for investment but the minimum investment here is much higher than a common investor can think of.

5Gold Exchange Traded Funds (ETFs)
Gold ETFs are a hot option these days. These are like mutual funds that invest only in gold. They are proving to be an easier and safer mode to buy gold. The charges are very less and the gold can be accessed electronically. The disadvantage is that one never gets to ‘see’ one’s holdings.

Where should you get your gold?
Gold is a ‘must have’ in your investment portfolio. Frankly, there is no need to advocate investment in gold amongst Indian audiences.

Traditionally, it is a popular avenue of investment for Indians. However, buying jewelry is not as good an investment as buying pure 24 karat gold (only for investing purpose).  Hence, when we talk of gold as an investment, we mean gold coins, gold biscuits or gold bars – any piece of 24 karat gold in any form.

Since gold is a popular investment, there are several avenues of buying it. Even banks and post offices sell gold. So, from where should you get your gold? Here are your choices:

All jewelers sell gold coins, gold biscuits and 24 karat gold rings. 24 karat gold rings are the most popular sellers. You can visit your trusted jeweler to purchase gold. You can resell a piece of 24 karat gold without any loss in value. It is important that you check that the gold coin / bar / ring etc has a 24 karat seal on it. The cases of fraud amongst jewelers are common; hence it is best to buy gold only from jewelers that you trust and that have a good reputation. It is a good idea to verify the purity of gold from another jeweler.

The advantage of buying gold from jewelers is that it is one of the cheapest sources plus it blends with consumer mindsets of buying gold from jewelry shops. Also, you can take it back to the same or any other jeweler and cash it at the current selling rate.

Banks too sell gold. State Bank of India, Axis Bank, Bank of India, ICICI Bank and HDFC Bank are amongst banking institutions selling gold coins. A bank is probably the most trusted source to buy gold. Since people trust their money to banks, buying gold from a bank is a viable idea. One can be sure of the purity of gold. Banks give certificates of purity for the gold coins they sell.

However, getting your gold from banks will be costlier as they charge a premium of 10 percent to 15 percent over the market rate. So, if your jeweler sells 1 gram of gold for Rs. 1853/- (as of June 06, 2010), you can get the same from a bank for an additional amount of Rs. 278/-. So, for 10 grams of gold, you will pay Rs. 2, 780/- more at the current rates.  This is a direct hit in your profits when you sell the gold. Also note that banks are not permitted to buy back the gold they sell. So, you will have to find another buyer for it.

Gold Exchange Traded Funds
If you are purchasing gold solely for investment purposes, you don’t really need to buy gold in its physical form. You can buy gold in demat form – gold exchange traded funds. A unit of an ETF fund approximates the value of 1 gram of gold. So, modest purchasers can also get into the gold market. ETFs can save you the cost of storage of gold coins and the time and effort to secure your purchase (such as bank locker charges). Further, you need not worry about the accuracy of weight or purity of the gold – Gold ETFs counter all the demerits involved in purchasing gold. Just one hitch – if you are buying gold coins for investment such that they can be converted to jewelry later on for any occasion like your child’s wedding – then this option does not work for you. The performance of Gold ETFs has been impressive.

Online over the Internet
As most of your other investments, gold can be purchased online too. Some jewelers also have started selling online. Security, accuracy of weight and purity of gold are major concerns here. So, you should buy from reliable sources only. Banks such as ICICI Bank also sell gold online. However, the same drawbacks related to buying from banks persist here.

Gold Retailers
Corporate giants also sell gold through their outlets spread across the nation. For example, TATA has a retail chain Tanishq. This is also a very reliable avenue and often used by companies to gift its employees.

Post offices
An extremely reliable source plus reasonable prices- Indian Postal Offices sell gold coins. Post offices of only a few cities extend this facility. However, this avenue has the potential of reaching out to remote areas. This is because, every village, however, small it may be, has a post office. It can be a very good alternative to local jewelers. Gold coins in lower denominations (0.5 grams, 1.0 grams, 5.0 grams and 8.0 grams) are also sold here so that most people can afford purchasing gold from post offices.

At present post offices in the following cities sell gold coins: Delhi, Ahmedabad, Surat, Baroda, Pune, Nashik, Nagpur, Mumbai, Chennai, Trichy, Coimbatore, Salem and Madurai.

Let’s, now, understand the features of gold as an investment.

1Current income
Gold in any form does not give any current income. The only exception is the dividend option in the Gold ETFs – if held in the physical form, there is only outflow of cash for the maintenance of lockers.

2Capital appreciation
Historically, gold has been the perfect hedge for inflation, but in terms of absolute returns gold has fared rather poorly giving returns at only 0.8 per cent above inflation. Real estate and shares beat gold squarely on the capital appreciation front. Real estate and shares have given returns of about 11 per cent over inflation since 1979 (1979 as that was the year the index called Sensex was formed).

In the short-run, however, gold is a very strong bet, compared to shares which are highly volatile. The idea for gold investment will be to use it at times when the markets are falling and when the inflation is very high.

A 5 per cent of the overall investment portfolio can be considered for gold investments (bullion, WGC coins, Gold ETFs). Jewelry is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolising wealth.

Gold does not carry much risk at least in India, as we hardly see deflation in the real sense. Even when the official figures where showing negative inflation (deflation) during the last year, the actual prices of food items were increasing. This was reflected in the gold prices too.

The real risk with buying gold is in the opportunity cost of investing in other avenues that can actually give higher returns.

Gold scores the highest in terms of liquidity, compared to all other investments. Banks would give you a jewelry loan. Gold jewelers would exchange your gold possessions for other gold jewels. But the problem is there is going to be making and wastage charges involved again. Here you lose the value (to the extent of 10 to 35 per cent) of gold jewels.

An unfortunate social aspect in most families in India related to liquidity is gold has sentiments attached and is the last item to leave the house in case of financial difficulties. This negates the entire purpose of having gold.

Remember: Many banks do not give loans on coins including their own.

5Tax Treatment
Gold suffers capital gains tax as per the Income Tax act. So it is better to ask your jeweler for the bill. Close to 90 per cent of the gold jewelry traded in India is unbilled. This is a serious problem for those who look at gold as an investment.

We can make use of indexation benefits when calculating the capital gains of gold. So the tax payable will not be much. Gold does not have any other tax benefits.

To look at gold as a hedge avenue, Indians are yet to consider this market actively as the purchases continue to be dominated by jewelry. Gold only beats inflation. It fares poorly when compared to real estate or shares when compared on the basis of real inflation adjusted returns

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