The newest way of investing in gold is through mutual fund schemes and exchange traded funds which have been launched in India in March 2007.
World over, gold has always been considered a safe investment option by many societies. Gold right deserves this reputation since in the last 500 years; it has always held it purchasing power ability in the worst times of human history. With the introduction of gold mutual funds and exchange trades funds in India in March 2007, it has now become possible for the common man to invest small (and large) amounts of money in this most favourite yellow metal without worrying about safety and quality.
In this article, we will discuss the various ways in which an individual can invest in Gold.
Types of Gold Investing Coins and Bars
Coins and bars are available in small quantities, 3, 5, 10 and 20gm sizes of 99.9% purity at most large banks and jewellery houses. They come in sealed and certified packets and are most suitable and popular with individual retail investors.
Gold Accounts and Gold Certificates
These are like bank accounts operated by banks in which physical Gold is actually there against the account owner’s name. In many ways, this is like keeping the Gold in a bank locker and paying a small amount for the security charges to the bank.
If the Gold coin / bar in the account has specific serial number to which the account owner’s name is linked, then it is called an “Allocated” account. If no specific coins or bars are attached, it’s called an “Unallocated Account”. In the Allocated account, you will always get the same coin / bar whenever you want to withdraw the Gold. In an “Unallocated” account, you will get different coins/bars but the weight, purity and fineness will always be the same.
Gold Mutual Fund Schemes and Exchange Traded Funds
The newest way of investing in gold is through mutual fund schemes and exchange traded funds which have been launched in India in March 2007. This is the safest and most convenient way for an individual to invest in Gold since there are no security and quality issues that one has to worry about.
The company issuing the fund actually buys physical gold to the extent that the investor puts in money. The company then issues an account statement with the details of the quantity, quality and price of Gold that was bought. The Gold is NOT given to the investor and is kept safely by the company. The investor can buy more or sell the Gold and get cash at market rates at any time he/she wishes.
If the scheme is listed on the stock exchange, then an investor can buy Gold through his stock trading account and the amount bought will reflect in the dmat account of the holder. This is most convenient since these types of transactions can now be done online and no paperwork is involved. It also allows for a very easy way to sell the Gold instantly on the market and get the market price. Since the quality of Gold is always guaranteed, there is nothing to worry about haggling about the price.
Futures and Options
Investors and trader who wish to trade Gold and take advantage of the price changes may consider futures and options contracts. They however involved the concept of leverage (or multiplying effect of profits and losses). Futures contracts for Gold are available in India on the MCX and NCDEX exchanges. Options contracts are NOT available in India. The futures contracts traded through commodity brokers and one needs to have a trading and commodity dmat account before one can participate in these trades.
Gold Mining Equities
One can also invest in Gold indirectly through buying shares of gold mining companies. However, this does the same as investment in physical gold. The share price of the gold producing company varies with the price of Gold. If Gold prices rise, then the profits of the company rise and vice versa.
However, many other factors have to be kept in mind here: the management of the company, the trading policies, committed contracts at a fixed price, the profitability of the company, what is its PE ratio, dividend payout ratio, government regulations, etc.
This option is not available in India as there are no Gold mining companies listed on the Indian stock exchanges. In US, Europe, South Africa and Canada this option is available. One advantage of this method is that there is the potential to generate income by way of dividends (which physical gold cannot give).
Gold-Linked Structured Products
These types of investments are typically complex and may involve several different types of combinations of the avenues discussed above. Various gold linked structured products are designed with different objectives: to provide income, capital appreciation, prevention of loss of value or a combination of these objectives.
These products are available on request with large banks (not yet available in India) and often, specialised custom tailored products can be created for those willing to put in a substantial investment. The financial institution dealing in this would provide further information on the details.
Investors should consider several factors before when choosing which method is the most suitable for him. Factors to keep in mind are: Gold is now available in physical form, as a paper certificate and electronic records, security and storage issues, expenses and taxes that may be involved. Any laws to consider? Is Gold for investing or trading and other issues?
Financial advisors and other investment professionals can provide further details about these products.
The Future of Gold
While it is beyond the scope of the this article to go into the details and reason, it is sufficient to state that there is a general consensus of opinion in the financial world that the price of Gold will go up in the next few years. It is quite possible that the dollar price of Gold will double in the next 5-10 years.
The principal reasons for this is that the US economy is getting weaker and as the value of the dollar falls in the coming years, the price of Gold will rise in order to preserve the purchasing power it has always had. Another fundamental reason is that there is a rising demand for the metal from India and China as more and more segments of the population are getting wealthier and are looking at ways to spend and invest in money and true to history, one of the things Indians love doing is to buy gold jewellery!
(The writer is a financial educator, investment advisor and stock broker. Views are invited on firstname.lastname@example.org)