Different ways to invest in gold

By | November 15, 2010

A look at the past 15-20 years record, it is seen that Gold is a hedge against inflation. Over the last 20 years, the average return from Gold has been around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term.

For centuries gold has been the ultimate cushion against the dangers of stocks price falls, fluctuating rate changes, inflation, rising/falling real estate prices, natural calamities, wars and more. Gold has been the best way to safeguard your investments against unstable financial markets.

Why is gold such a good investment?
Whether or not gold is a good investment, is a question that does not have a simple answer. Gold has appreciated substantially over the past couple of years. The growth rate of late has been much higher than the conventional rate of appreciation. However, if we look at the past 15-20 years record, it is seen that Gold is a hedge against inflation. Over the last 20 years, the average return from Gold has been around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term.

Also, another aspect that we should look at is a weakening currency. No matter which country you originate from, there is a chance that your country’s currency will suffer a downfall at a particular point of time. Gold, on the other hand, retains its true value and can help you protect your riches because it does not rely on the state of the country’s economic, whether it is on the up or downtrend. Therefore, investing a small portion of one’s investment portfolio in gold would be a good idea.

How can one invest in gold?
Gold can be bought in various forms and the decision should be based on the reason you need gold. If you see this purely as an investment, you can either buy it in the form of physical gold — bars, biscuits and or coins or even in a dematerialized form.

For most Indians, gold purchases usually mean buying jewellery. However, the disadvantage of buying gold in the form of jewellery is that its resale is not always a profitable proposition.

Here are some other ways of investing in gold:

Gold ETFs
You can invest in gold by buying Gold Exchange Traded Funds (ETFs). Being ETFs, these funds are listed and traded on the stock exchange i.e. investors can buy and sell them like any other stock on the stock exchange, on a real- time basis. All you need is a demat account and a share trading account with a broker or sub-broker who deals in stocks. These are traded in units of one. That means you can buy one or more units at a time. Each unit represents approximately the market value of one gram of gold.

Gold ETFs are traded close to real-time gold prices in the market, that is, ETF prices move up and down with the market price of gold in the conventional marketplace. Your expenses in an ETF would be very low: you would pay securities transaction tax (STT), brokerage /service tax, and the like, which are unlikely to exceed around 1% of market price. You’d hold gold in demat form in your demat account, just as you hold shares. If you decide to sell your ETF units, you can do so through your stock broker or sub-broker and the charges would be the same as what you paid while buying the ETF. Thus an ETF is very convenient, and you need not worry about the purity of the gold, secure storage, insurance against theft, and so on.

Physical gold
This is the traditional way to invest in gold. Investors can buy gold and then store it in a bank’s locker. If you are one of those people who keep buying gold jewellery for a marriage of a daughter or son, a better option would be to buy gold ETF units now at the current price of gold, hold them in your demat account, and sell them in the future, whenever you want, and use the money to buy jewellery then. In this way, you will be protecting yourself from rising gold prices, while also sparing yourself anxiety about the purity and safety of your gold. You can keep accumulating gold at a slow rate, perhaps even one gram at a time.

It is evident that gold is an asset class that you can rarely go wrong with. Therefore, think seriously about investing in gold.

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6 thoughts on “Different ways to invest in gold

    1. Sundar Rajan

      A better option is to buy gold from banks and then put them in Gold Deposit Schemes offered by a few banks. The advantages are –

      1. Your Gold is Safe.
      2. Purity is guaranteed
      3. You also get interest for the gold deposited
      4. The gold and the interest is exempted from Income Tax, Wealth Tax and Capital Gains tax.

      SBI and Allahabad bank offer this scheme. Allahabad bank's scheme is the most attractive. It offers 4% interest and the rate of gold is slightly lower.

  1. ta rajeev

    How can I belive that an agent will' t cheat me….
    Which is the best share brocker's…….

  2. S.Lakshminarayanan

    A very good balanced unbiased article giving all the facts both for and against the ETF gold. For the first time in the recent past have I come across such factual and balanced article. Very often the authors recommending ETF tend to overlook the cost of purchase and sale of ETF through brokers online and don't even mention it. Only this author has brought out the exact amount or percentage one has to incur in buying or selling ETF Gold. I appreciate it.

    However it may not work out cheaper than physical Gold Coins of high purity being sold by certain banks like SBI/HDFC etc. Could somebody work out the comparison of Gold coin of high purity from SA?Y SBI or HDFC Bank ( including locker charges)with that of ETFincluding brokerage and depository charges). Shall be thankful for such analysis

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