India is crazy about gold jewellery. With the World Gold Council (WGC) aggressively marketing social and religious functions as gold buying events, the demand has shot up in the recent years to record levels. Research shows that over 16,000 tonnes of gold is there in Indian households predominantly in the form of jewellery. The value of this as per market price is a whooping Rs. 27.2 lakh crore. That is close to twice the foreign exchange reserves held by the RBI. Let's consider the factors one needs to be aware of and the know-how of investing in gold.
Gold, the shining yellow metal is one of the most popular investment options. It is considered as a safe haven against all national, political and cultural crisis.
Traditionally gold has been considered as the most favored currency of the world’s population. The value of gold is negatively correlated to shares. When the economy is not stable, the price of gold appreciates.
The positive of investing in gold is, it improves the consistency of the investments. A majority of the financial planners recommends around 15– 20% allocation of the total portfolio to Gold.
Investment in gold can be made in two forms –
1) Physical form
2) Non Physical form.
Investment in physical gold is in form of Coins / Bars in addition to the jewellery which every household have.
Whereas Non physical form of investment can be in the form of Gold Exchange Traded Fund ( ETF - A Financial product designed to give an opportunity to the investors to invest in gold without taking the physical custody of the yellow metal ). Most of the banks are selling gold coins / bars where one can invest. Many banks and few private organizations also provide the option of gold loans.
Have you ever thought about it ?
Shall I invest in the yellow metal or white metal ?
The answer is “No”, as we prefer the gold metal any time over the white metal. But past few years data shows silver has given better returns than gold.
1. Forms of buying gold
Any investor has to be aware of the different forms of buying gold. Jewellery, the most traditional and the dominant form of buying gold in India, is in fact not an investment idea. The reason is that 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.
Bank coins, again, are not an investment idea as the premium that banks charge for their coins is around 5-10 per cent. Also, the bank coins have lesser liquidity as they are not bought back by the banks.
Bullion bars are good modes for investment but the minimum investment here is much higher than a common investor can think of.
Gold Exchange Traded Funds (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.
2. Current 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.
3. Capital appreciation
Historically, gold has been the perfect hedge for inflation. This is based on data from the year 1800 AD. 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 Sensex was launches).
In the short run, however, gold is a very strong bet compared to shares that 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). Jewellery is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolizing wealth.
4. Risk
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.
5. Liquidity
Gold scores the highest in terms of liquidity, compared to all other investments. At any time of the day and any day gold can literally be converted to cash. Banks would give you a jewellery loan (remember though that many banks do not give loans on coins, including their own), and so would your friendly neighborhood pawn shop. They can also be sold in some pawn shops, though many are cautious to purchase in these outlets for fear of 'stolen jewellery'.
Gold jewelers would exchange your gold possessions for other gold jewels. But the problem here is that there is going to be making and wastage charges involved again. Here we lose the value (to the extent of 10-35 per cent) of gold jewels.
An unfortunate social aspect in most families in India related to liquidity is that gold has sentiments attached and is the last item to leave the house in case of financial difficulties. This negates the entire purpose of gold having liquidity.
6. Tax treatment
Gold suffers capital gains tax as per the IT Act. So it is better to ask your jeweler for the bill. Close to 90 per cent of the gold jewellery traded in India is unbilled. This is a serious problem for those who look at gold as an investment. Only the branded jewellers would automatically give you a bill. At other places ask for one.
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.
7. Convenience
Gold scores very high here. But with the per gram price rising, the smallest single investment is becoming higher. With the emergence of golf ETFs the convenience to hold gold for the short term has increased. Instead of holding cash for the short term, one can today make investments in gold ETFs.
Ten Benefits of Investment in Gold
1) Safe investment
Throughout the world gold is considered as safe investment as it has not been impacted in a large economic conditions such as
a) Inflation,
b) Market uncertainty, and
c) Political discontent.
In fact the price of gold is resistant to short term political upheaval and economic conditions. The range of movement of gold is very narrow compared to other investments
2) Decent or high rate of return
Observing the trend of last decade, the average rate of return had been high at 18.43% (refer rate of return report for last decade) and this trend is expected to continue further. Return from gold had never been disappointed in long period of time.
In fact last decade return has been much better than any other traditional form of investment like fixed deposit.
3) Can be invested in small parts
In today’s stock market there are various type of instruments available to invest in gold by which investment can be made in a very small pieces.
For example investment can be made via gold ETF as low as 1 gram. Also there are other schemes available in the market where you can invest as low as Rs 100 ( $ 2.25 ).
4) Various form of investment is available in the market
There are number of instruments available in the market to invest in gold say such as
1) Jewellery
2) Gold coins
3) Gold ETF , etc.
5) Can be pledged for Loan.
Gold can be pledged for loan. In fact it is the easiest form of obtaining loan against security. There are Public sector and Private sector Banks and number of companies, also dealing in providing loan against gold like
Muthoot Finance,
Manappuram gold loan.
HDFC gold loan etc.
A minimal documentation is only needed for obtaining loan against gold moreover you need not wait for approval for long period of time as most of the companies approving loan against gold on the spot itself.
6) Can be utilized for personal use
Gold can be utilized for personal use in form of jewellery / ornaments. In fact this is one of the few investments that can be utilized for personal use also.
7) Diversify your portfolio
Investment in gold is considered as instrument of diversifying your investment portfolio to reduce risk. Studies show portfolios having gold as diversified instrument are more robust and better able to deal with market uncertainties as gold is mostly uncorrelated with most other assets and moves independent of key economic indicators This makes it as a good diversification opportunity in portfolios.
8) Recognized investment throughout the world
Gold has a intrinsic value hence unlike other investments which are connected to a specific Continent / Country / Province / State / Area / Location ,gold is a recognized investment instrument and it is not connected / belonging to a specific Continent / Country / Province / State / Area / Location.
9) Can be held in dematerialized form
Gold can be invested in both forms namely
a) Material ( Physical ) form or
b) Dematerialized ( Non-Physical ) form.
Via Gold ETF one can invest in dematerialized form hence does not bear the risk of Encroach, Encumbrance, theft, lost, storage … etc.
10) Can be held for any time of period- No maturity period
Unlike other instruments of investment having certain maturity period, investment in gold can be sustainable for unlimited period of time, without bothering about the maturity period.
Top 5 Things to Consider Before Purchasing Gold
Investing in gold may be your best investment yet, but there are several things that you need to consider to make sure that you are on the right path.
You will be dealing with a great deal of money here and since this is an investment, you must guarantee yourself returns in the future, whether this is a short-term or long-term investment.
What are the things that you need to do first before buying gold?
How can you exercise caution while finding the best type of gold investment for you?
Here are the top five things you can do:
#1. Do your research on what types of gold you should invest in.
There are different types of gold that you can invest in. Although most people think that physical gold (gold coins or bars) are the best ways to invest in gold, know that you have other options which may be best suited for your investment goals. Here they are:
Gold Bars.
This is the easiest way to invest in gold as you can buy it from many gold dealers at low premiums. Comparing prices in gold bars is easier so you have a real good chance at finding the best deal. Read our in-depth buyers guide to purchasing gold bars by clicking here.
Gold Bullion Coins.
Another simple way to invest in gold as there are plenty of dealers out there for coins as well. The great thing about gold coins is you can work with any budget.
IRA
Most individuals aren’t familiar with the term self directed IRA. This type of account allows you to place precious metals like gold and silver in your IRA account. This is perfect if you wish to rollover a 401k because these are backed by one asset class. We have a company that we highly recommend if you are considering anything like this. Read our review about this company.
Gold Certificates.
Investing in gold certificates is not as straightforward as investing in physical gold, but this will remove complications when it comes to the delivery of gold and storing it.
Gold ETF’s and Gold Stocks.
For investors who are used to investing in stocks, this is the best type of gold investment. It is open to anybody and it doesn’t take a genius to understand this investment.
Gold Futures.
This is probably the most complex gold investment you can make. It is also riskier too. This is better suited for people who have a good enough experience in making investments. Investing in gold futures can bring greater returns, but the risk should be understood first.
#2. Have questions ready when speaking with gold company representatives.
When buying gold, you will have to talk directly to gold company representatives. They will say anything to get you to buy from them, but you have to be smart about this. Make sure you ask the right questions and get the relevant information you need to make the best decision.
Know the terms.
If you don’t understand the terms they use like “spot,” “troy ounce” or “bid,” ask them. It is important that you know what these terms mean before you start buying gold.
Ask the price.
Knowing the price is one of the most important things because you’d want to know if you’re buying your gold at the best price. Asking prices from different gold companies is ideal so you can make a comparison.
Know the company’s background.
If you will be dealing with this company, then you have every right to know who you’re dealing with. Ask for the company background including its years in business, number of clients, BBB rating, and etc.
Aside from asking questions, do your homework as well. Research on the type of gold you’re buying, the premiums, the usual price range and also, the company you are dealing with.
#3. Decide how much you plan on purchasing.
This decision will ultimately depend on you and your budget. But some insight on the ideal percentage to spend will be helpful in your endeavor. In buying or investing in gold, a rule of thumb is to spend 10 to 30% of your assets.
Determining your percentage will depend on your economic, political and financial standing. Your safest bet is at 20 percent.
#4. Are you buying for the short term or long term?
Before buying gold, you must decide whether this is a short term or long term investment. You must know that there are specific types of gold that is better used for a short term or long term investment.
With short term gold investments, you’re better off buying gold bullion coins or bars for the reason that their prices keep moving up. Hence, when you decide to sell it later, you’re sure to earn a profit. You can keep your gold coins or bars for at least two years before selling them.
For long term gold investments, it is best that you invest in grade-certified gold coins. In other words, these are rare American gold coins. These types of coins always outperform the value of gold bullion coins.
On the other hand, it is always your choice what type of gold investment you will make. Again, it will also depend on your personal preference and experience. In any case, gold will always be a lucrative investment to have.
#5. Where to store the gold after your purchase?
One of the worries when buying physical gold is where to store it once you have it. It is for this reason why some investors prefer buying other forms of gold. They don’t want to be bothered with the physical storing of these precious metals.
But if you prefer investing in physical gold, here are your different storage options:
At home. You can store your gold at home but keep them at a minimum. For one, your home may be private but it is more susceptible to theft. You can also risk the gold being stolen while in transport to and from your home. Gold worth below $10,000 need not be reported anymore.
Safe Deposit Box. This is a good option to store your gold as it is safer but still maintaining your privacy. However, renting a safe deposit box can put you back $100 to $300 a year.
Precious Metal Vault. Usually, the precious metal vault is for corporate clients. The storage fee and insurance fee are cheaper and clients can deposit large amounts of gold. Precious metal vaults are very secure.
Allocated Gold with Custodians. The custodian will hold the gold you bought. For example, if you buy 10 ounces of gold, the custodian’s system will put 10 ounces of gold under your name. That is your allocated gold. They will keep it in their own vault. There is a 100 percent guarantee from the custodian of your gold.
These are the five things you should do or ask yourself before buying gold. Be meticulous and cautious so you can make a good investment.
Conclusion
Gold has proved itself time and again to be the perfect hedge for inflation. But to look at it as a hedge avenue, Indians are yet to consider this market actively as the purchases continue to be dominated by jewellery. Gold only beats inflation. It fares poorly when compared to real estate or shares when compared on the basis of real inflation adjusted returns.
Any serious investor, however, is advised to have a certain percentage of investment in gold to hedge inflation.
Traditionally gold has been considered as the most favored currency of the world’s population. The value of gold is negatively correlated to shares. When the economy is not stable, the price of gold appreciates.
The positive of investing in gold is, it improves the consistency of the investments. A majority of the financial planners recommends around 15– 20% allocation of the total portfolio to Gold.
Investment in gold can be made in two forms –
1) Physical form
2) Non Physical form.
Investment in physical gold is in form of Coins / Bars in addition to the jewellery which every household have.
Whereas Non physical form of investment can be in the form of Gold Exchange Traded Fund ( ETF - A Financial product designed to give an opportunity to the investors to invest in gold without taking the physical custody of the yellow metal ). Most of the banks are selling gold coins / bars where one can invest. Many banks and few private organizations also provide the option of gold loans.
Have you ever thought about it ?
Shall I invest in the yellow metal or white metal ?
The answer is “No”, as we prefer the gold metal any time over the white metal. But past few years data shows silver has given better returns than gold.
1. Forms of buying gold
Any investor has to be aware of the different forms of buying gold. Jewellery, the most traditional and the dominant form of buying gold in India, is in fact not an investment idea. The reason is that 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.
Bank coins, again, are not an investment idea as the premium that banks charge for their coins is around 5-10 per cent. Also, the bank coins have lesser liquidity as they are not bought back by the banks.
Bullion bars are good modes for investment but the minimum investment here is much higher than a common investor can think of.
Gold Exchange Traded Funds (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.
2. Current 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.
3. Capital appreciation
Historically, gold has been the perfect hedge for inflation. This is based on data from the year 1800 AD. 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 Sensex was launches).
In the short run, however, gold is a very strong bet compared to shares that 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). Jewellery is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolizing wealth.
4. Risk
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.
5. Liquidity
Gold scores the highest in terms of liquidity, compared to all other investments. At any time of the day and any day gold can literally be converted to cash. Banks would give you a jewellery loan (remember though that many banks do not give loans on coins, including their own), and so would your friendly neighborhood pawn shop. They can also be sold in some pawn shops, though many are cautious to purchase in these outlets for fear of 'stolen jewellery'.
Gold jewelers would exchange your gold possessions for other gold jewels. But the problem here is that there is going to be making and wastage charges involved again. Here we lose the value (to the extent of 10-35 per cent) of gold jewels.
An unfortunate social aspect in most families in India related to liquidity is that gold has sentiments attached and is the last item to leave the house in case of financial difficulties. This negates the entire purpose of gold having liquidity.
6. Tax treatment
Gold suffers capital gains tax as per the IT Act. So it is better to ask your jeweler for the bill. Close to 90 per cent of the gold jewellery traded in India is unbilled. This is a serious problem for those who look at gold as an investment. Only the branded jewellers would automatically give you a bill. At other places ask for one.
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.
7. Convenience
Gold scores very high here. But with the per gram price rising, the smallest single investment is becoming higher. With the emergence of golf ETFs the convenience to hold gold for the short term has increased. Instead of holding cash for the short term, one can today make investments in gold ETFs.
Ten Benefits of Investment in Gold
1) Safe investment
Throughout the world gold is considered as safe investment as it has not been impacted in a large economic conditions such as
a) Inflation,
b) Market uncertainty, and
c) Political discontent.
In fact the price of gold is resistant to short term political upheaval and economic conditions. The range of movement of gold is very narrow compared to other investments
2) Decent or high rate of return
Observing the trend of last decade, the average rate of return had been high at 18.43% (refer rate of return report for last decade) and this trend is expected to continue further. Return from gold had never been disappointed in long period of time.
In fact last decade return has been much better than any other traditional form of investment like fixed deposit.
3) Can be invested in small parts
In today’s stock market there are various type of instruments available to invest in gold by which investment can be made in a very small pieces.
For example investment can be made via gold ETF as low as 1 gram. Also there are other schemes available in the market where you can invest as low as Rs 100 ( $ 2.25 ).
4) Various form of investment is available in the market
There are number of instruments available in the market to invest in gold say such as
1) Jewellery
2) Gold coins
3) Gold ETF , etc.
5) Can be pledged for Loan.
Gold can be pledged for loan. In fact it is the easiest form of obtaining loan against security. There are Public sector and Private sector Banks and number of companies, also dealing in providing loan against gold like
Muthoot Finance,
Manappuram gold loan.
HDFC gold loan etc.
A minimal documentation is only needed for obtaining loan against gold moreover you need not wait for approval for long period of time as most of the companies approving loan against gold on the spot itself.
6) Can be utilized for personal use
Gold can be utilized for personal use in form of jewellery / ornaments. In fact this is one of the few investments that can be utilized for personal use also.
7) Diversify your portfolio
Investment in gold is considered as instrument of diversifying your investment portfolio to reduce risk. Studies show portfolios having gold as diversified instrument are more robust and better able to deal with market uncertainties as gold is mostly uncorrelated with most other assets and moves independent of key economic indicators This makes it as a good diversification opportunity in portfolios.
8) Recognized investment throughout the world
Gold has a intrinsic value hence unlike other investments which are connected to a specific Continent / Country / Province / State / Area / Location ,gold is a recognized investment instrument and it is not connected / belonging to a specific Continent / Country / Province / State / Area / Location.
9) Can be held in dematerialized form
Gold can be invested in both forms namely
a) Material ( Physical ) form or
b) Dematerialized ( Non-Physical ) form.
Via Gold ETF one can invest in dematerialized form hence does not bear the risk of Encroach, Encumbrance, theft, lost, storage … etc.
10) Can be held for any time of period- No maturity period
Unlike other instruments of investment having certain maturity period, investment in gold can be sustainable for unlimited period of time, without bothering about the maturity period.
Top 5 Things to Consider Before Purchasing Gold
Investing in gold may be your best investment yet, but there are several things that you need to consider to make sure that you are on the right path.
You will be dealing with a great deal of money here and since this is an investment, you must guarantee yourself returns in the future, whether this is a short-term or long-term investment.
What are the things that you need to do first before buying gold?
How can you exercise caution while finding the best type of gold investment for you?
Here are the top five things you can do:
#1. Do your research on what types of gold you should invest in.
There are different types of gold that you can invest in. Although most people think that physical gold (gold coins or bars) are the best ways to invest in gold, know that you have other options which may be best suited for your investment goals. Here they are:
Gold Bars.
This is the easiest way to invest in gold as you can buy it from many gold dealers at low premiums. Comparing prices in gold bars is easier so you have a real good chance at finding the best deal. Read our in-depth buyers guide to purchasing gold bars by clicking here.
Gold Bullion Coins.
Another simple way to invest in gold as there are plenty of dealers out there for coins as well. The great thing about gold coins is you can work with any budget.
IRA
Most individuals aren’t familiar with the term self directed IRA. This type of account allows you to place precious metals like gold and silver in your IRA account. This is perfect if you wish to rollover a 401k because these are backed by one asset class. We have a company that we highly recommend if you are considering anything like this. Read our review about this company.
Gold Certificates.
Investing in gold certificates is not as straightforward as investing in physical gold, but this will remove complications when it comes to the delivery of gold and storing it.
Gold ETF’s and Gold Stocks.
For investors who are used to investing in stocks, this is the best type of gold investment. It is open to anybody and it doesn’t take a genius to understand this investment.
Gold Futures.
This is probably the most complex gold investment you can make. It is also riskier too. This is better suited for people who have a good enough experience in making investments. Investing in gold futures can bring greater returns, but the risk should be understood first.
#2. Have questions ready when speaking with gold company representatives.
When buying gold, you will have to talk directly to gold company representatives. They will say anything to get you to buy from them, but you have to be smart about this. Make sure you ask the right questions and get the relevant information you need to make the best decision.
Know the terms.
If you don’t understand the terms they use like “spot,” “troy ounce” or “bid,” ask them. It is important that you know what these terms mean before you start buying gold.
Ask the price.
Knowing the price is one of the most important things because you’d want to know if you’re buying your gold at the best price. Asking prices from different gold companies is ideal so you can make a comparison.
Know the company’s background.
If you will be dealing with this company, then you have every right to know who you’re dealing with. Ask for the company background including its years in business, number of clients, BBB rating, and etc.
Aside from asking questions, do your homework as well. Research on the type of gold you’re buying, the premiums, the usual price range and also, the company you are dealing with.
#3. Decide how much you plan on purchasing.
This decision will ultimately depend on you and your budget. But some insight on the ideal percentage to spend will be helpful in your endeavor. In buying or investing in gold, a rule of thumb is to spend 10 to 30% of your assets.
Determining your percentage will depend on your economic, political and financial standing. Your safest bet is at 20 percent.
#4. Are you buying for the short term or long term?
Before buying gold, you must decide whether this is a short term or long term investment. You must know that there are specific types of gold that is better used for a short term or long term investment.
With short term gold investments, you’re better off buying gold bullion coins or bars for the reason that their prices keep moving up. Hence, when you decide to sell it later, you’re sure to earn a profit. You can keep your gold coins or bars for at least two years before selling them.
For long term gold investments, it is best that you invest in grade-certified gold coins. In other words, these are rare American gold coins. These types of coins always outperform the value of gold bullion coins.
On the other hand, it is always your choice what type of gold investment you will make. Again, it will also depend on your personal preference and experience. In any case, gold will always be a lucrative investment to have.
#5. Where to store the gold after your purchase?
One of the worries when buying physical gold is where to store it once you have it. It is for this reason why some investors prefer buying other forms of gold. They don’t want to be bothered with the physical storing of these precious metals.
But if you prefer investing in physical gold, here are your different storage options:
At home. You can store your gold at home but keep them at a minimum. For one, your home may be private but it is more susceptible to theft. You can also risk the gold being stolen while in transport to and from your home. Gold worth below $10,000 need not be reported anymore.
Safe Deposit Box. This is a good option to store your gold as it is safer but still maintaining your privacy. However, renting a safe deposit box can put you back $100 to $300 a year.
Precious Metal Vault. Usually, the precious metal vault is for corporate clients. The storage fee and insurance fee are cheaper and clients can deposit large amounts of gold. Precious metal vaults are very secure.
Allocated Gold with Custodians. The custodian will hold the gold you bought. For example, if you buy 10 ounces of gold, the custodian’s system will put 10 ounces of gold under your name. That is your allocated gold. They will keep it in their own vault. There is a 100 percent guarantee from the custodian of your gold.
These are the five things you should do or ask yourself before buying gold. Be meticulous and cautious so you can make a good investment.
Conclusion
Gold has proved itself time and again to be the perfect hedge for inflation. But to look at it as a hedge avenue, Indians are yet to consider this market actively as the purchases continue to be dominated by jewellery. Gold only beats inflation. It fares poorly when compared to real estate or shares when compared on the basis of real inflation adjusted returns.
Any serious investor, however, is advised to have a certain percentage of investment in gold to hedge inflation.
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