• In today’s troubled economic scenario, we prefer the kind of investments that will protect

our wealth rather than create wealth for us. Gold is one such investment. It is a bedrock
of investments that can weather any storm. Gold as an asset has long-term intrinsic value,
which helps shield our investment from inflation, currency debasement and equity market
declines. At the same time, it saves the country’s purchasing power from nosediving. In
fact, it offers the best protection against volatile markets. The reason: gold prices are
maintained or increased irrespective of the country’s economy moves in an upward or a
downward direction. From the last 20-30 years, gold prices have been on a steady and
continuous rise. The precious metal has given returns of around 9.45 per cent as the
prices went up from Rs 1,000 per 10 gram in 1979 to its present value of Rs 15,000 per
10 gram.
Highlights
o Gold helps shield
investment from inflation,
currency debasement and
equity market declines
o Gold prices are
generally not affected by the
economic conditions

o One should allocate at

least 10-20 per cent of one’s
investment portfolio towards
gold, irrespective of the risk
appetite

Why should we invest in gold?

Gold is a proven way to preserve wealth, especially when the local currency is losing
value. It is also valuable for things beyond investments as demonstrated by its ever-
increasing demand. The demand for the yellow metal is so high that its current
consumption has exceeded its production. The production of gold is controlled by a few
companies; whenever the prices of gold fall below its production costs, these companies
stop their operations. This mechanism creates a stable floor price for gold. Thus when
market plunges, like stock prices gold prices do not get affected, and cushion our
investment portfolio against downturns.

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Ways to invest in gold

We Indians have been the largest buyers of natural gold, but it’s not long ago that we
recognised its value as an asset and start adding it to our investment portfolio.
Investments in gold are made through gold coins, gold jewellery, gold bullion (biscuits or
 bars trading through demat account), gold futures, gold ETFs and the recently-
acknowledged gold mining companies. Gold jewellery, no doubt, carries high emotions
and intrinsic value in real sense, however it is not the smartest way to invest in gold,
mainly on account of the uncertainty of quality of gold used and high additional making
costs. In terms of return too, you find variations in the forms of gold investment. You can
make 100 per cent in gold stocks, 50 per cent in gold coins or bars, or even 500 per cent
in gold futures. Table 1 briefly describes the different aspects of gold investment while
Table 2 delves into the tax structure of the different forms of gold investment. Let us
understand both in detail:

Table 1: Comparison between Different Forms of Gold Investments

Cost of Safety/Storage
Purity Liquidity Return
Buying Risk
Low; high
Uncertain; initial cost
Gold
High comes in Moderate involves in Storage risk
ornaments
different carats making
ornaments
Low as banks
charges storage
Gold coins High Highest Low Storage risk
cost, insurance,
etc.
Comparable to
Gold ETFs Lowest Highest High No storage risk
market returns
Company
Gold Depends upon
performance Market and
mining Lowest High company
defines its company risk
companies performance
existence
Storage risk;
Gold
Lowest Highest High Used as a hedge needs to take
futures
delivery on expiry
Bullion Comparable to
Lowest Highest High Storage risk
Gold market returns
Table 2: Tax Treatments of Different Gold Investments
Short-term Gains1 Long-term Gains2
Gold ornaments within 3 years After 3 years
Gold coins within 3 years After 3 years
Gold ETFs Within 1 year After 1 year
Gold mining companies Within 1 year After 1 year
Gold futures Within 1 year After 1 year
Bullion Gold within 3 years After 3 years
1
Taxed as per applicable income slab, 2 Taxed at 20 per cent with indexation benefit

Gold jewellery

We all love the yellow metal, don’t we? Be it in whatever form, jewellery or others.
Nothing can match the emotions that are attached to the buying of gold jewellery. In
India, we buy gold jewellery either out of desire (to wear gold ornaments) or needs
(mandatory purchase in marriages and other functions). This is an expensive way of
buying the precious metal since a buyer has to pay for the craftsmanship associated with
the making of jewellery, which increases the total cost. Moreover, selling of the jewellery
may not fetch the same price in case the current market price does not exceed the buying
price.

Gold coins

It is one of the purest forms of gold. All the commercial banks and financial distributors
are authorised to sell gold coins of 24 karat (the purest), with a certification from an
independent agency. The prices of gold coins depend on the daily market rates of gold.
But banks don’t buy the coins back, so our only option to get our money back in this case
will be by selling the coins to jewellers at the prevailing market price.

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Gold mining companies

It is not a direct investment in gold but in the stocks or shares of a gold mining and
exploration company. It brings additional rewards as well as its share of risks. The price
of these stocks moves with the price of the gold and also depends on the company’s
future outlook. In India, there are not many gold mining companies but on the
international front one will find companies such as Newcrest Mining, Barrick Gold,
Impala, Gold Corp, Lihir Gold, etc. However, we can invest in world (gold) mining
stocks through mutual funds such as DSL BlackRock (DSPBR World Gold Fund) and
AIG India MF (AIG World Gold).

Gold futures

Gold futures are a sophisticated tool to invest in gold markets. But be cautious: Risks
attached to gold futures are of the highest level. One can make 500 per cent in a single
day by trading in gold futures or even lose all the money put up. However, gold futures
are not about minuses only. Its plus point is it eliminates the hassle and costs of
settlement and storage. Investors need much less money (margin money) to participate in
 quite large scale. Even traders can short sell as the market is deep and liquid. But these
options are not recommended for retail investors.

Gold ETFs

It is a very recent development that the market regulator SEBI allowed gold Exchange
Traded Funds (ETFs) in India. Gold ETFs enable investors to purchase and sell shares of
a mutual fund whose primary asset is gold. These funds are listed on the stock exchanges,
i.e., can be bought or sold like other stocks or shares. But one needs to have a demat
account and a share trading account to invest in gold ETFs. The unit size in a gold ETF is
as small as one gram of gold equivalents. Investments in gold ETFs are eligible for tax
treatments similar to that in a debt mutual fund and subject to long-term capital gains
after one year against three years for physical gold. The cost involved is also less and
investors do not face the risk involved in holding gold like theft. Some of the gold ETFs
are UTI Gold ETF, Gold BeES, Kotak Gold ETF and Reliance Gold ETF.

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Gold bullion

This investment avenue is open for investors with a higher investment corpus or greater
risk profile. Gold bullion or bars can be bought or sold with the help of brokerage firms
or gold dealers. It is traded on commodity exchanges, i.e., MCX and NCDEX, at an
amount above the market price of gold. Investors can keep the bars in their custody or
leave them with the broking firm. Though the brokerage charged in this case is very low
compared to market price, its overall cost is more as it also involves storage and assay
(analyse gold to determine its composition) costs.

Historical returns of different gold investment options

Let us analyse the performance of different gold products as on July 31, 2009 with the
help of Table 3. The data has been obtained from www.mcxindia.com and
www.mutualfundsindia.com, an online arm of Financial Technologies and ICRA Online
Ltd, respectively. The table shows that all investments with gold as an asset have given
comparable returns of around 16 per cent while the return of gold mining dedicated
mutual fund (AIG World Gold) is stipulated to a paltry 3.48 per cent. The fall in return in
the mutual fund can be attributed to underperformance of gold mining stocks due to a
slump in gold demand. But in case of gold ornaments and gold coins, the return would be
comparatively less than gold bullion and gold ETFs as they also involve making costs
and storage costs.

Table 3: Historical Returns1 in One-year Category

Forms of Gold Investment One Year
Gold ETFs 15.98%
Gold mining companies (AIG World Gold) 3.48%
Gold futures 16.58%
Gold bullion 17.54%
1
As on July 31, 2009

Source: MCX, ICRA Online

Gold in portfolio

Since gold has emerged as an asset class, fund managers are advising investors to allocate
at least 10-20 per cent of their investment portfolio towards gold, irrespective of their risk
appetite. It has seen that trading in Gold ETFs is the best way to invest in gold given its
low cost of buying, high liquidity, low risk associated with it, etc. Moreover, whatever be
the economic scenario, gold will always remain the best hedge against inflation and also
help in achieving our long-term goals.