Looking for the cheapest and best option to invest in gold? Raj Pradhan offers a guide
In the previous piece, we have explained why gold is not an investment; it only moves with the dollar and rupee exchange rate and, most importantly, the negative real interest rate in the US. Most of us will not be able to track these factors. In fact, it is a blind bet to invest in gold without understanding any of these factors, because when these macrofactors change, gold will fall like a stone, leaving you baffled. However, you may still need to buy gold for specific occasions, such as your child’s wedding. For this, you may be looking for the best options to invest in gold, bearing in mind the cost, storage and ease of buying and selling.
The table alongside provides a complete guide to the different options. We have excluded the futures market which is for hedgers and speculators. But, before we discuss the various options in detail, remember that when its prices are at a record high, going for lump sum investment is a bad idea. A systematic investment plan (SIP) is a better way to invest in gold. Even so, SIP is not the best option. If your need for gold is after 10 years and the gold price at the end of 10 years is lower than the prices from today till the end of the 10-year period, an SIP will yield less amount of gold than the gold you can purchase at the end of 10 years, as a lump sum for your child’s wedding.
Gold buying option
Physical gold and silver
Why go for it?
• For those paranoid about losing physical control of gold, this is the best option. All other forms of gold holdings are just paper gold/silver and you are
dependent on some other entity to manage your gold and its security can never be 100%, even with all the regulations in place.
• Gold does not take much space due to high density.
• Gold has impurities from iridium and ruthenium as well as uncertainty of carat information when you buy gold. An untrained eye cannot spot the difference.
• A customer has to look for a reputed jeweller, look for certification which authenticates the purity of gold or the Bureau of Indian Standards (BIS) Hallmark. Gold buying is not as easy as it was in the times gone by.
• Fear of theft and, hence, need for proper storage space and possibly insurance.
• Your selling price will always be lower than the market price.
• Most physical transactions of gold happen in cash.
Customers try to avoid VAT (value-added tax) (1%) by paying cash or black money is used to purchase gold. Gold sales are also transacted in cash to avoid paying capital gains tax. It’s hard to justify the money if there is an income-tax audit or a cross-check of an entity’s books. Huge cash deposits or withdrawal from bank accounts are subject to questioning. Insist on taking receipt for gold purchase after paying VAT and pay capital gains on profits to avoid getting caught (even if you buy and sell in cash). In case you are cheated by a jeweller, you cannot file a complaint without a receipt.
Iridium or ruthenium may be embedded in what you call ‘gold’. On an average, a piece of jewellery or a bar of gold contains nearly 5%-6% of the impurity. Even as late as in 2006, there were few checks for iridium or ruthenium impurities. Neither the traditional approach of rubbing on a touchstone nor the X-ray fluorescence (XRF) machines for testing gold purity detected these impurities. There was extensive adulteration at that time and the damage has already been done. BIS issued a circular to all hallmarking centres to re-calibrate their XRF machines to look for iridium and ruthenium. Hallmarked gold sold between 2001 and 2006 could be of spurious quality.
The worry is that new cheaper impurity may replace those. Less than half of the gold sold in India is hallmarked. In small towns and villages that consume two-thirds of India’s gold, hallmarking is absent. Moneylife spoke to a few jewellers on 100-gram Swiss bullion (99.9% pure), which revealed that the market has spurious bullion too.
Whenever this writer went to sell gold in the past, jewellers would invariably say: “Market is volatile; we can pay only so much.” The spread between the price they sell to you and buy back from you is very wide, to protect their profits. Small jewellers will offer better prices for your gold, but they are only intermediaries as they sell it to dealers immediately. If the amount is high, the payment may get delayed. Also, your gold is subject to their testing by a machine or any other way. Both of these carry risks for you.
If you possess physical gold, hold on to it, unless you need cash for emergencies. If you need physical gold for goals in life (totalling less than 5%-10% of your assets), buy physical certified/hallmarked gold with a receipt. If you are an investor, use other options as detailed below.
Why go for it?
• Easy to buy and sell, provided volumes are high (this is true mainly of Gold Benchmark Exchange Traded Scheme).
• There is no wealth tax and, hence, this option is a good one for high net-worth individuals (HNIs).
• The expense ratio of 1%-1.5% is high when gold does not move much (the last decade was an exception).
• You cannot get physical gold.
• Price spreads are high and liquidity is low. After record volumes in recent months, volumes in gold ETFs seem to have nosedived in February 2011 to 50,000 units compared with the last six months’ average of over 106,000 units a day.
• Gold ETFs will not appeal to those interested in gold as a status symbol.
There are worries—unfounded, as yet—whether gold ETFs have enough gold backing them. Gold ETFs are backed by gold which is kept with a custodian of repute. Recently, SEBI has made it mandatory for auditors of gold ETF schemes to physically verify the gold which gives a reasonable assurance to investors that gold ETFs are backed by physical gold.
Why go for it?
• It’s the only way to buy non-physical silver.
• There used to be annual recurring expenses, but these
have been removed.
• Remat to physical gold is allowed after paying VAT, delivery charges and making charges.
• Price is transparent and liquidity more than gold ETFs.
• Wealth tax is an issue for HNIs. You will also have to pay wealth tax of 1% (on amounts over Rs30 lakh) if the total value of your taxable wealth (together with the market value of e-Gold) exceeds Rs30 lakh.
• The exchange is new (started 17 March 2010) and hence the track record is not that long. Also, a grievance redressal mechanism may not be in place.
• You need a new demat account.
Launched a year ago by the National Spot Exchange, (NSEL) e-Gold had annual recurring expenses of 0.40% and storage charges of Rs0.60/unit/month for holding in demat form. Towards the end of the year, players did away with all the charges. It’s great news for customers, especially for big players who don’t have to spend anything on storage or any annual charge that could be hefty for large customer holdings. The question is: How will the NSEL manage all the expenses—especially for storage and insurance?
Brinks Arya, the designated vaulting agency, is fully insured. At any given point of time, e-Gold units are fully backed by an equivalent quantity of gold kept with its vaulting agency. If an individual wants to take physical delivery of e-Gold units, she can take it in multiples of 8gm, 10gm, 100gm and 1kg. To start with, the Exchange has delivery centres at Ahmedabad, Delhi and Mumbai. There are plans to open delivery centres in other cities. NSEL is in talks with over 100 jewellers across the country to facilitate conversion of e-Gold and e-Silver in demat form directly into jewellery items.
Anjani Sinha, managing director and CEO of NSEL, told Moneylife: “A number of jewellers have evinced interest in this facility. The registration process is on, and will be completed with over 100 empanelled jewellers spread across the country, by the end of the current financial year.” This move would benefit small customers immensely in terms of savings in gold and silver jewellery, as such investors preferred jewellery items to coins and bars. Mr Sinha, however, cautioned that the Exchange would not guarantee purity and making charges (the fee for converting a gold item into jewellery), as these fell beyond its purview. Making charges vary depending on jewellery design and trends. Therefore, that has to be negotiated by clients with the jewellers.
Gold fund of funds
Why go for it?
• No demat needed. This is an advantage for small investors who don’t want to be bothered by demat accounts and associated charges.
• You can use SIP for smaller amounts.
• The charges will be higher than gold ETFs (in some cases) or e-Gold.
• The Reliance scheme has 2% exit-load for redemption within one year. The Kotak scheme has 2% exit-load for redemption before six months; 1% after six months and before one year.
Reliance Mutual Fund has so far collected Rs500 crore from 200,000 investors under its gold FoF. Those who don’t invest in equities and, hence, avoid opening demat accounts may buy into this scheme. The convenience of SIP and small investment opportunity is another lure for retail customers. Will gold FoFs or even gold ETFs be beneficial for someone accumulating gold for life goals like a child’s marriage? When there is need for physical gold, there is no remat. The customer has to sell her gold FoF/ETF holdings and then go out to buy gold. There will be short/long term tax that will eat into the amount of gold you can buy for meeting your goal. If, on the other hand, you purchase physical gold by creating your own SIP, there is no tax incidence, assuming that the gold is retained after your child’s marriage. The e-Gold remat feature also offers a similar advantage.
SBI gold deposit scheme
If you have physical gold and wish to earn interest on it you can deposit it in the Gold Deposit Scheme (GDS) of the State Bank of India (SBI) or jeweller schemes. You will get more gold back than your deposit if you leave it with them for a fixed duration. Also, if gold value increases over the period, your gold becomes more valuable at the end of the term.
Why go for it?
• The interest on this deposit is tax-free. Also, there is no
wealth tax for the duration of deposit which is
beneficial for HNIs.
• You don’t have to worry about safety. The gold will
become part of the Indian Mint for the duration of
• There is no worry of default as SBI deposits in the
Indian Mint can be trusted.
• The minimum amount is 500gm and may be out of reach for the common man. The main depositors are temple trusts.
• The interest rate for a three-year deposit is 1%, for four years it is 1.25% and, for a five-year tenure, it is
1.5%. It’s not great.
• You will not get your jewellery back in the same form. SBI melts the deposited gold to check the purity and then converts it into bars. Depending on the results, SBI sends a gold deposit certificate within 90 days. The Bank bears all expenses associated with this process. The gold is returned in bar/bullion or equivalent cash. If you deposit in bar or bullion, the Scheme is more beneficial. There could still be a small loss according to the weight evaluation as per the Indian Mint.
• Withdrawal before three years attracts a 0.5% penalty.
Jeweller gold deposit schemes
Why go for it?
• High interest of 7.5% offered by jewellers.
• Tiny amounts of gold can be deposited.
• No worry about safe keeping.
• The schemes are unregulated. If the jeweller shuts shop, you cannot turn to anyone for help.
• You will not get your jewellery back in the same form. Gold is melted and reused. There will be some difference in weight calculation in the process. If you deposit in coin or bullion, the scheme is more beneficial as you can expect to get the full weight credited.
Gold purchase in instalments
Tanishq of Titan Industries has the ‘11+1 Plan’ under the Golden Harvest Savings Scheme. According to the Plan you pay in instalments for a fixed duration (11 months) and the jeweller will pay the last instalment. With this amount, you can buy gold anywhere in India from any Tanishq showroom at the end of the year.
Why go for it?
• The return works out to over 15% on your scaled investment in the 11+1 Plan of the Scheme. According to the Tanishq website, over 3.5 lakh customers have invested in this Scheme.
• No tax deducted as there is no interest involved. No
hassles like Know Your Customer (KYC) norms.
• Doing it with Tanishq is fine but these schemes are unregulated. If your jeweller shuts shop, you cannot turn to anyone for help.
• You cannot buy gold coins/bars, silver coins and solitaires under the Golden Harvest scheme. You can only buy their jewellery, which normally carries a 12% to 20% making charge and wastage. You are buying it at a rate that is prevailing at the time of buying. So, if you believe gold prices are going to rise, you are better off with gold ETFs or e-Gold.
This is a complete summary of the different options to buy gold. The problems with gold are impurity and security. Also, despite all the regulations, no investment vehicles like gold ETFs, e-Gold, gold FoF or physical gold can be scam-proof or assured to be free of any impurities in the underlying gold. E-Gold looks like the best option today. It is cheaper, easy to buy and lets you get physical gold without any hassles of storage.