Avenues For Gold Investment

Times immemorial, gold has been treated as hedge or cushion against dangers of stock market volatility, changing interest rates, inflation, changing real estate prices, natural calamities, wars, etc. Because of these benefits, gold has begun to be considered as a separate asset class. Investors look at investing in gold as a strategy of appropriate asset allocation. Gold, as an investment avenue, has given 122.09 per cent returns in last 5 years. If not gallop, gold prices are expected to rise moderately in mid and long-term. Hence, it would be good diversification strategy to have gold in your portfolio to hedge in difficult times.

Gold Prices In Last 5 Years

Source: www.goldprice.org

Indians are the largest consumers of gold, but historically, we have been buying gold in its physical form, that too in the form of jewellery. Buying gold in its physical form has its own pros and cons. Where on one hand, it undoubtedly makes you rich and reflects your status, when you wear; on the other hand, huge cost spent on designs would go waste, leaving you in lurch. In addition, when owned in physical form, you would have to spend in storing and securing jewellery, which further adds to the tension. Furthermore, physical gold cannot be bought in physical forms and the thought of its purity is taxing enough. Be it, gold coins, gold bars or jewellery, you would be troubled by the same concerns more or less.

To help investors overcome these troubles, innovative products such as gold ETFs, gold mutual funds and E-gold have been brought in market. Out of these, gold mutual funds are derived instruments, which invest in gold ETFs and gold mining companies. They are useful for those investors, who do not have knowledge of the market and hence fins it difficult to ascertain the avenues, where the money in gold can be invested. For investing in these funds, investors have to bear the costs of investing in mutual funds as well as underlying schemes (gold ETFs, etc.). Hence, they may prove expensive to retail investors. The brighter side of these funds is that you do not have to open a demat account to invest in these funds like E-gold and gold ETFs.

The other options of investing in gold as a commodity are gold ETFs and E-gold.

The National Spot Exchange (NSEL) has introduced E-series products in commodities including e-gold, e-silver and e-copper. Trading in E-gold has been started almost a year back, on 17 March 2010. Both Gold ETFs and E-gold are units of gold, in dematerialized/ paper form, which are traded on the exchange like that of stocks of listed companies. These products provide retail investors a means of participating in trading of gold.

Difference In E-Gold And Gold ETFs

There are underlying differences in both (E-gold and Gold ETFs) the products. The cost to benefit comparison needs to be done to find out which will be more profitable to invest in.

• E-gold require separate demat account: For investing in Gold ETFs, you will have to open a demat account, post margins and commence trading. If you already have a demat account, which you were using for trading in shares, you can trade in Gold ETFs with the same account.

In contrast to this, E-gold cannot be traded with same demat account that you have been using for share trading. Instead, a separate demat account with one of the Depository Participant (DP) empanelled with the NSEL will be required. The list of such depository participants is available at NSEL web site.

In addition of having a DEMAT account with one of the DPs empanelled with NSEL for keeping your E-gold units, you would also need to have a client's account or trading account with any member of the NSEL. The list of members is available at NSEL website

This means, the initiation cost of investing in E-gold is either equal to or more than investing in Gold ETFs.

• Time of trading: Similar to gold ETFs, E-gold is fully backed by an equivalent amount of gold kept with the custodian. But unlike gold ETF, E-gold can be traded on the exchange from 10 am to 11.30 pm on weekdays, whereas gold ETFs can only be traded during market timings.

• Physical delivery: Gold ETFs can be bought and sold in dematerialized form and hence its re-materialization is not possible. This means that you cannot convert your ETFs into physical form. However, this drawback has been done away with E-gold. Here, a physical delivery of gold in the form of bar or coin in specified lots and in multiples of 8 grams, 10 grams, 100 grams and 1 kg in Ahmedabad, Mumbai and Delhi is possible. The range of locations will keep on expanding. For taking physical delivery, the investor will have to submit a delivery instruction slip (DIS) to DP along with a Surrender Request Form (SRF). In E-gold, the purity of gold is guaranteed by the London Bullion Market Association. Hence, investors do not have to worry about the purity of gold in E-gold and gold ETFs.

• Comparison of returns: According to an article titled ‘E-Gold outperforms other investment options’ by Dilip Jha, published in Business Standard on February 15, 2011; E-gold outperformed other gold investment avenues in 2010. Though spot gold has given slightly higher returns, but considering the fact that physical gold involves higher risks, investors preferred E-gold.

Source: Business Standard

One of the major reasons behind gold ETFs not giving as high returns as spot gold is that gold ETFs invest a small percentage, around 10 per cent, in money market and debt instruments, which cause the tracking error (difference between the returns of benchmark and returns of fund in which you have invested) to rise.

For investors’ ease, National Spot Exchange Limited is in talks with over 100 jewellers for the conversion of E-gold into jewellery.

• Charges on E-gold: Following charges are applicable if you invest in E-gold

1. Transaction charges: The Exchange levies a turnover charge of Rs 20 per lakh of turnover, to both buyer and seller member, on monthly basis.

2. Dematerialization/ Corporate action charges: This is a one-time cost, levied by NSEL, for converting physical gold into demat form. Every investor, when buying gold in demat form have to bear these charges, which can further be passed on to other investors at the time of selling E-gold units.

3. Storage charges: They are no longer applicable.

4. Delivery charges: In respect of buying and selling E-gold units in demat form; the exchange will not levy any delivery charges. However, if you want to convert commodity in physical form, the exchange levies a delivery/lifting charges at the rate of Rs 200 per lifting, irrespective of number of coins/ bars involved in the delivery instruction.

5. Making and packaging charges in case of Gold Coins: Delivery and making charges are applicable only at the time of physical delivery and not if you sell E-gold in open market in exchange of cash. In addition to the charges imposed by DP and Depository, the exchange levies following charges on account of cost of making, packaging and refinery certification charges:

All recurring charges, in case of E-gold, are 1-1.50 per cent across industry.

Charges on gold ETFs:

Conclusion

Overall comparison reveals that investing in E-gold is more cost-effective as compared to gold ETFs and spot gold. Be it charges, conversion into physical form or else trading hours, E-gold scores over others.