Why to invest in GOLD and How

Why invest in GOLD?

There are many reasons why we shall look beyond conventional Fixed Deposits , PPF and high growth Shares and Mutual Funds. Gold is always seen as a thing to own and only for consuming as ornaments , for jewellery but seldom as an investment purpose , in fact silver also for that matter.

But now there are many reasons to invest in GOLD , just like people invest in Shares , Mutual funds , PPF , NSC and Fixed Deposits.

Reason 1: Stock Markets are becoming risky and uncertain

Stock Markets are in Bad shape for atleast short or medium term atleast. No one knows whats going to happen in 6 months or 1 year or 2 year. Long term may be good but still medium term perspective is not very clear. Not only Stock Market , but whole of financial Markets are uncertain , if you consider problems like Inflation , dip in projected GDP growth of economy etc .

Reason 2 : It acts like hedge towards Inflation and Foreign currency

As Indian currency is gaining against Dollar and other currencies , Rupees is set to become more strong in coming years. Gold has inverse relation with Dollar.

http://news.goldseek.com/SpeculativeInvestor/1171382460.php

In future as Dollar weakens , GOLD will become more strong.

Reason 3 : Its a relatively less known investment option and has high potential in future

Looking at history , and every time we see that a investment option starts becoming popular and by the time most people know about it , it already gives most of its returns and becomes a talk of past.

GOLD has started gaining attention as investment option and becoming popular and still in its middle stage , if not early. So its the time to ride the boat.

Reason 4 : Future High Demand and less supply

In future gold is going to in high demand and its already in less supply , so according to the demand-supply logic the prices are bound to go up in near future. Indians account for 23% of world's total annual consumption and overall global demand has increased 15% Year on year

Gold demands were on all time high in 2007 and expected to increase in coming years due to mismatch in demand and supply.

Reason 5 : More Diversification

Before some time back , diversification of portfolio was limited to Equity , Debt and Real Estate and some cash , so that your risk is spread across different class of assets. GOLD has evolved as another asset class and not it help in diversifying your portfolio.

Whats the Best way to invest in GOLD ?

It really depends on person and situation and the motive of investment.

One can invest in GOLD directly by buying gold in physical form like jewellery , gold biscuits , gold bars. It all of these require some maintenance and some problems are associated with investing in physical format like :

- No surety of purity , you can be sure that you got the same purity as promised

- Preserving cost : if you have physical gold , you will invest in bank locker etc for secure storage.

- Risk of theft , mishandling etc

To avoid all these problems , we have an alternate way of investing in GOLD , called Gold ETF's , read it next ...

What are GOLD ETF's

Gold ETF's are special type of ETF's (Exchange traded funds) , ETF are not covered here , but view them as open ended mutual funds , which are traded on stock exchange just like normal stocks. You can buy units on Stock Exchange , each unit is equivalent to one gram of gold or .5 grams of gold.

So if you want to invest in 100 grams of gold , you can buy 100 units of a GOLD ETF from stock exchange , you can buy it just like any share from stock exchange.

gold ETF's price changes real time , as they are traded on stock exchange like shares.

In India currently there are Five Gold ETF's.

- Benchmark Gold ETF (Stock Code on NSE/BSE : GOLDEX ) (the first one in country)

- UTI Gold ETF (Stock Code on NSE/BSE : UTGOLD )

and other 3 from Reliance , Quantum and Kotak listed on NSE.

Gold has returned 38% in last 1 year and 170% in last 5 years (absolute). And it looks great in future.

You can easily enter and exit from GOLD ETF's unlike physical gold.

How investing in Gold ETF's scores over Physical gold like Bars or jewellery ?

Comparison of GOLD ETF's vs GOLD BARS vs Jewellery

Consider you are investing Rs 1 Lacs in Gold , there are 4 parameters to judge.

If you purchase Them

- Jewellery : Making charges of 15-20%

- Gold Bar : 10% to 20% mark up charges by banks.

- Gold ETF: 1.5-2.5% entry load

If you Sell

- Jewellery : 10% - 20% is lost due to Purity issues

- Gold Bar : Banks do not take it back , so premium paid at time of purchase is written off.

- Gold ETF : Brokerage of 1% or even less

Maintenance Charges

- Jewellery : Insurance charges and locker charges (if you put it in locker)

- Gold Bar : Insurance charges and locker charges (if you put it in locker)

- Gold ETF : 1.5 - 2.5 %

Tax Implications

- Jewellery : Long term capital gain of 20% , but after 3 years. 1% wealth tax

- Gold Bar : Long term capital gain of 20% , but after 3 years. 1% wealth tax

- Gold ETF : Long term Capital tax of 20% , but after 1 year. No wealth tax

Note : Gold is taxed at 30% if held for less than 1 year in any format.

So on all these 4 scenarios , GOLD ETF's score heavily over other means of investing in GOLD.

To read more on why gold is a must buy now and how silver is much better than gold , read http://silverstockreport.com/

I would be happy to read your comments or disagreement on any topic. Please leave a comment.