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 goldu00a0-- "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.u00a0u00a0


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

Form
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 marginu00a0 (from anywhere between 0.5 - 4 per cent).

Wealth Tax
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

Quantity
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.

Efficient
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 Girgaumu00a0

Innovative
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 exampleu00a0-- 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

Companies
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 approximatelyu00a0 '27500/10 gm' oru00a0 '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

Production
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