In gold we trust! – Part 3: Where to invest?

There are many forms of gold investment. How an individual chooses to invest in gold depends on the size of the investment, his/her reason for investing, and the purpose of the investment.

Physical Holding - Bars and coins, ornaments, Bullion Accounts (allocated & unallocated) with banks, metal vaults, demat gold on commodity exchange etc.

Derivatives or indirect forms - Gold futures, options, gold ETF (Electronically Traded Funds) i.e. gold traded in the form of a security on stock exchanges around the world.

Most of these forms of investment are well defined & explained on World Gold Council’s website at http://www.invest.gold.org/sites/en/how_to_invest/.

I am assuming that the reader has gotten acquainted himself/ herself with these options. I will jump right into my recommendations.

I prefer options that provide Physical Holding over the ones that give indirect ownership on gold. Why invest in derivatives when the paper that you hold is not backed by the equal quantity of gold itself? If one wants to invest in derivatives of gold, then why not hold currency notes?! This may sound little extreme or even misplaced to some. However if one looks at the evolution of global monetary system, even today gold has a significant role to play. May be that role has somewhat been diluted since collapse of Bullion Standard. However there are a few vivid examples in recent times that point to the significance of gold even today. Remember the occasion in 1991 when Indian central bank (RBI) had to pledge physical gold with the UK? Central banks still try to back their currency through gold reserves. Almost 12% to 15% of total reserves held by central banks are in gold. So the currency notes are in a certain way still a derivation of gold itself! Why go to other gold derivatives when some of your wealth is anyways in form of cash or bank deposits?

Now let’s turn our attention to physical forms of gold investment. According to World Gold Council, 75% of gold demand is for jewelry, 10% for industrial use and only 15% is for investment purpose. For centuries, an Indian has been “investing” in gold by buying jewelry. I wonder why we think that buying ornaments is a form of “investment”. After interviewing few jewelers, I discovered that any person who buys ornaments stands to lose anywhere between 7% and 18% of the original investment – depending on the making charges for the design – when it is time to encash the so called “investment”. Making charges vary from Rs. 50 per gram for very simple designs to even Rs. 250 for some exotic varieties. No jeweler – not even the one from whom you purchased the jewelry – puts any value to the making charges when you want to sell it. Similarly the buy/ sell spread for jewelry is usually high. You would hardly find any jeweler who would give you cash for the jewelry purchased from any other jeweler. He may offer to exchange it though; however the discounting could be high.

Gold bars & coins – During the last decade, Indian banks were allowed to import gold & sell it in the open market to the retail customers. However here too, the loss is too much to bear. E.g. ICICI Bank charges up-front premium of approx 15% over the ruling gold prices! Besides, they are not going to buy the same gold if you wish to sell! You still have to turn to the jewelers to sell it. And guess what – the jewelers will mostly deny giving you cash in return!! They might exchange it for their own gold though.

So what is the way out? Here is what I would recommend.

If your quantity is limited, then find a local jeweler who has a strong history & credibility in the market. Purchase ‘Vedhane’ from the guy. ‘Vedhane’ is kind of a bare-bones gold ring without any special making charges. The advantages are that this comes in pure gold form - 23.5 to 24 carats - & does not attract any making charges. Plus the buy/ sell spread when you go to encash the same, is minimal. Based on my interviews with a few well known jewelers, I concluded that the transaction charge (including buy & sell) can be as low as 0.75% to 1% barring VAT which anyways is common for any option you take. Safety of your investment is a challenge in this option. Hence a Safe Deposit Vault with a reputed bank is recommended.

If your quantity is in kilos, then demat gold (e.g. i-Gold offered by Multi Commodity Exchange of India – MCX) or metal vaults (e.g. something like Bullion Vault) are recommended. In both these options, the investor gets a guarantee of physical delivery if one demands it. Also the buying, selling, storage & safety of your investment are virtually the non-issues. However the charges are obviously slightly high. E.g. if you bought & sold 1 kilo of demat gold through i-Gold in single fiscal year, then you would end up paying anywhere between 2.25% to 2.8% as total transaction charges depending on the turnover commitments that you make. These charges include brokerage for buying & selling, service tax & custody + insurance charges for 1 year. I have not considered VAT here too since it is going to be common for any transaction (1%).

So to conclude – have your gold investments as a mix of “Vedhane” from a reputed jeweler & something like i-Gold, depending on the individual’s deal size, safety parameters & comfort level. If you have a choice, then I would recommend buying this form of gold in non-festive & non-marriage seasons. As for me, I am a regular buyer & seller of “Vedhane” & have had adequate returns! I am actively considering an i-Gold account for myself. Remember – any investment is as good as the quality of your decision to buy AND sell. I strongly believe in realized gains.