Dispelling doubts and clearing the haze of confusion about gold and silver
In a complex world, one cannot blame people for getting increasingly confused about different ways of investing in and holding gold. Off late, there has been a barrage of information about the yellow metal. Your well-meaning neighbour might exhort you to buy gold -- "the time is now, I am telling you" and investment experts may have their say in the media but amidst this blitzkrieg of information it is important to be clear in what form you want to buy and hold gold.
Shine on: Nationalist Congress Party's (NCP) Samrat Moze (30) from
Pune, sports gold weighing 8.5 kg that cost over Rs 2.37 cr
The most conventional and a popular way of investing in gold is through physical gold. This is mainly for two reasons. First, it is a good asset class for someone who needs to park his black money. Secondly, it gives one a high of buying a "real thing". But it has its own implications. If you buy it from a goldsmith or jeweller, there may be a doubt on the purity of the substance. On the other hand, if you buy it from a bank, their prices are higher (anywhere from 12 to 15 per cent) as compared to the current market rate and they, the banks, do not buy it back. Jewellers buy back the gold keeping a margin (from anywhere between 0.5 - 4 per cent).
Physical gold is subjected to wealth tax. On sale, it is subjected to Short Term Capital Gain (STCG) if sold within three years from date of purchase and is subjected to Long Term Capital Gain (LTCG) if sold after three years.
Other things, which go against, are issues of storage, safety and insurance. Also, affordability may be an issue because buying small coins again and again may be a hassle.
O mere dil ke chain: Music director and singer Bappi Lahiri, with is
trademark gold round the neck
The Gold Exchange Traded Funds (ETF) purchases a large amount of gold and maintains the physical metal in storage. It then issues units corresponding to the quantity of gold; the idea being the price of units will fluctuate with the price of gold. For example, a unit of Gold ETF may be the fixed equivalent to one gram of gold. These units can be bought and sold over the stock exchange. You have to own a demat account where these units would be held.
Nowadays, there are mutual fund schemes available, which invests in these ETFs. Hence, it will save you from the hassle of opening a demat account.
Gold held in paper or demat form, as in ETF is more tax efficient. It is not subjected to wealth tax. On sale, it is subjected to STCG if sold within one year from date of purchase and to LTCG if sold after one year. Since LTCG tax rates are lower, this may provide an edge. ETF stands out as a better bet, in terms of storage, safety, insurance and affordability. The cost incurred is an expense ratio charged by the fund house, which is one per cent every year on the value of investment and brokerage paid to your share broker for transaction.
Buy zone: Gold ornaments on display at a showroom in Girgaum
Shares Of Gold Mining Companies are one of the most innovative, though risky ways of investing in gold. Either directly or through few specialised mutual funds available in the market, one can buy equity (shares) of gold mining companies. These shares can provide an estimated leverage of 5.4 to 1, which means that for every 1 per cent rise in gold price; there is a 5.4 per cent rise in the price of shares. That is what makes them risky, as it will react in similar fashion when prices go down. This was happening until recently but the recent economic downturn has thrown this co-relation away. For example -- in the last one year, gold has given an absolute return of approximately 32 per cent but a popular gold mining fund has given a return of approximately, -2 per cent.
Midas touch: Gold bangles hold a special allure
This is the same as ETF. One has to invest in non-Indian companies for the lack of options here. When buying such shares, one needs to consider other things like Price-to-Earnings (PE) ratio, financial performance, Mergers And Acquisitions (M & A) activities and the hedging policy of the company. Also, these companies are subjected to various risks such as exploration risk, decline in production, depletion of reserves, production cost and labour issues.
Even as I wrote this article yesterday, silver was trading at approximately '51700/Kg' or '1518/oz' (ounce) while gold was trading at approximately '27500/10 gm' or '85104/oz'. We have witnessed huge volatility last year where gold touched a high of, '90400/oz' and has fallen by almost 6 per cent to the current level. Similarly, silver touched a high of, '74300/kg' and has fallen by over 30 per cent. Investors are concerned about the right time to invest, but also there is increasing confusion about better investment options. This piece will hopefully dispel some of that confusion and help you in decide which is better? Gold or Silver.
All that glitters: Getting ornaments ready to be out in a mould
Firstly, let us focus on basics. Gold is costlier than silver because it is a rare commodity. Approximately, global annual production of silver is 600 million ounces while that of gold is 80 million ounces. This implies that the world mines around seven times more silver each year, than gold. Taking only this into account, one might infer that gold should be seven times costlier than gold but actually today it is approximately 55 times.
Gold has been one of the most sought after commodities. India is the world's largest consumer of gold. But actually gold has very low industrial usage, compared to silver. Also, because of its inherent value, gold is recycled and 95 per cent of it is re-used or held by us. Silver, on the other hand, has high industrial usage, for example, 40 per cent of global demand of silver comes from the electronic industry alone. Silver is used in such small quantities that it is not economically recoverable. Also, because it is used in very small quantities the high price cannot replace its demand.
Coming back to the price of the two metals, today you need 56 ounces of silver to purchase every ounce of gold. How can silver be available for so much lesser than gold when already mined silver reserves are depleting and its demand is ever increasing? Looking at the price trend, it may indicate that gold is better than silver. We can now assess though that silver has more 'value' than gold. This fundamental valuation would definitely be realised by everyone. Once that happens, there will be predictions that silver will outperform gold. People will start buying the white metal. What we don't know is, 'when' that will happen. Even I cannot predict when exactly that juncture would come.
At the same time, I don't see any reason to wait and jump onto the bandwagon when everyone does. The time to get on is now.
Some Frequently Asked Questions (FAQs) about gold
I have a lot of gold jewellery and I want to sell it. Where do I sell and what is the procedure, so that it can fetch a good price? Also, do I sell now or wait?
The best way to get a good price for your gold jewellery is to get it valued by a government approved valuer. The valuer will give you an independent authentic report and the same can be used by you to bargain with your jeweller at the time of selling. Once you have got it valued, it does not matter where you want to sell because now you know the actual value and can sell it to the jeweller who is giving you the best price. As for the timing, it completely depends on your personal financial conditions. The best way to approach it is to make a proper asset allocation of your portfolio and re-balance it as per the allocation. Personally, I feel that gold bought in form of jewellery is not an investment but an expenditure done for consumption, but still if you consider this as investment the best approach is not to try and time the market and follow your asset allocation.
Is this the right time to buy gold?
If you are looking to buy gold as an investment to make good returns you need to consider a few points. Essentially, a retail investor has access to four kinds of asset classes viz Equity, Debt, Real Estate and Gold. The best approach is to have a balanced portfolio with calculated exposure to each asset class. Gold has been a good performer in the calendar year 2011 giving returns of 32 per cent. But, if you look in the long term, returns from gold has been approximately 25 per cent p.a. in last the five years, 20 per cent p.a. in the last 10 years, 11.5 per cent p.a. in the last 15 years and 10.68 per cent p.a. in the last 20 years. These returns are due to the bull run during the last five years. Otherwise, for a period of 15 years from 1991 to 2006, returns from gold were only six per cent p.a. Essentially; gold is looked as an asset class, which is hedge against inflation. This can be seen from its long-term returns. Out of the last 20 calendar years, gold has given negative return for four calendar years. What I am stressing on is that, there is no best investment option; the best option is to diversify as per your risk profile and stick to your asset allocation.
If you are looking to buy it for your personal use, it would not be a good idea to try and time the market. However, given the current volatility it makes sense to purchase in small quantities over a period of the next few months.
How can I check the reliability of a gold dealer?
The ideal manner is to by gold from a branded jewellery shop. The latest change in the law makes it compulsory for all gold jewellers to sell only hallmarked jewellery. Some big stores even have a purity meter in their store and you can get the purity checked yourself. Gold can be held in physical form as well as demat form. Hence, from an investment point of view the hurdle of purity can be overcome by investing in e-form.
If I want to buy gold, should I go in for bars or coins?
While investing in gold the most important parameters are of cost and purity. Investing in coins and bars is similar, as they attract similar making charges, which are minimal. But, it would not be very fruitful to invest in gold in form of jewellery, as a part of your investment will be deducted in making charges. For purity, it makes sense to buy from branded shops, which have purity certification. Buying gold from banks may not be a great idea as they charge a premium and if you want to sell, they don't buy it back.
Where can I get my daily price of gold?
Gold prices used by various jewellers and gold traders are referred from www.mcxindia.com. Apart from that, there are various sites, which can give daily price of gold like www.goldprice.org. Gold prices are also available in leading daily newspapers and various business channels.
Saurabh Mittal is an investment advisor. You can email him at firstname.lastname@example.org