Gold-An Ideal Investment Avenue

Gold is one of the most popular precious metals for investment today. It can be passed on from one generation to the other by way of inheritance, bought for consumption purpose or as an investment avenue. Thus, we can attach following 7values to Gold:

• Hedging: Gold is considered as a hedge against inflation. It can be considered as a refuge during uncertain times.
• Volatility: Gold prices do not fluctuate with changing political conditions, which might be the case with equity or debt
• Investments: Gold prices are not correlated with the other financial markets such as stocks which makes it effective hedge against volatility and market decline.
• Law of Demand & Supply: Since gold is natural metal and not something that can be manufactured or grown, the supply is very limited compared to its ever-increasing demand despite the peaking prices.
• International Economic Scenario: European sovereign debt crisis, rising inflation, rising oil prices, fluctuating US dollar may further attribute to the gold reaching new peaks.
• Emotional Value: Gold in the form of Inheritance / gift on special occasions like marriage, birthdays, etc.
• Consumption Value: For self consumption or for future generations for their consumption or gifts.

Five Ways of Investing in Gold

1. Purchase of Physical Gold

It's the most conventional way of buying gold. It includes buying gold from our age old family jeweller in the form of readymade jewellery, made to order jewellery or coins, rings, and so on. Nowadays banks too, sell gold coins, biscuits, bars etc.

However there are certain drawbacks of owning physical gold

• Storage & Safety: Physical gold requires storage like a safe or bank locker and risks associated with physical gold like theft or losing it also cannot be ruled out.
• Emotional Touch: Most of the times jewellery or ornaments have an emotional value attached to it. Hence it cannot be considered as a liquid asset in times of crisis.
• Costs involved:It involves some expenses like making charges, locker charges, if insured then insurance premium and so on.
• Taxation: In case of physical gold, the minimum holding period is 3 years for benefit of long term capital gain. If sold before 3 years one has to pay short term capital gain taxed at the individual tax slab. In case of other forms of investment in gold the period for long term capital gains is holding period of more than 1 year.
• Wealth Tax: Physical gold attracts wealth tax if the value of the gold exceeds 30 lakhs.

2. Investment through Gold Mutual Funds

Investing in gold mutual funds is like investing in any mutual fund actively managed by a fund manager through SIPs. In this, the funds are invested in gold mines to reap the benefits.

The features of this type are as follows:

• Benefit of Rupee Cost Averaging: Since the investments are in the form of SIPs, one can enjoy the benefits of rupee cost averaging without bothering much about the swinging markets.
• Ease of Operation: No demat a/c is required like in case of gold ETFs or E-gold.
• Safety & Security:Since no physical gold is involved it is safer to invest in gold mutual funds.
• Costs Involved: Expenses on account of fund management charges are higher as compared to the ETFs but lower compared to the expenses incurred on physical gold.
• Redemption Process: On redemption, the amount of funds will be dependent on the closing NAV of the fund. Also, redeeming them before a stipulated time frame may attract exit load.
• Profitability: In case gold mining companies are making profits, the investors in turn are benefitted.
• Taxation: The long term capital gain, i.e. profits made on funds redeemed after a year, are taxed @ 10.3% with indexation & 20.6% without indexation benefit.
• Wealth Tax: Gold Mutual Funds do not attract any wealth tax liability.

3. Gold Exchange Traded Funds (ETFs)

Exchange Traded Funds or ETF is like trading shares on a stock exchange but treated as mutual funds.

In case of Gold ETFs, Gold is a security under consideration. One can purchase units of gold in multiples of 1 unit. 1 Unit = 1 gram of gold. (A few fund houses also trade ½ gram gold as one unit.) As one invests in mutual funds by way of SIPs or lump sum payments, in the same fashion investments in ETFs can also be done on a periodic basis. The units of ETFs like share trading can be traded on a stock exchange by opening a Demat A/c. The NAV of the gold ETF varies according to the variations in the gold prices.

Gold ETFs are considered as debt mutual funds for tax purposes. The gains from sale of units held for a period of less than 12 months are treated as Short Term Capital Gains & taxed as per individual's tax slab (it can be as high as 30.9% if one falls under highest tax slab). If units are sold after a year then the long term capital gain is taxed @ 10.3% with indexation & 20.6% without indexation.

• Safety & Storage: Since there is no physical gold involved it is a safer avenue for investment in gold. So there is no question of storage as well.
• Less Expensive: Lower Expense Ratio compared to Gold Mutual Funds. Also no making charges, locker charges are applicable in case of ETFs.
• Tax Efficiency:If held for more than a year ETFs are tax efficient as compared to physical gold sales. Also ETFs don't attract Wealth Tax, Security Transaction Tax (STT) as well.
• Affordability: Gold can be bought in as small quantity as 1 gram gold.
• Purity: ETFs guarantee purity of gold, usually 99.5%.
• Liquidity & Transparency: Gold ETFs can easily be bought & sold on exchanges and hence there is transparency in the prices.
• Advantageous for HNIs: HNIs can have advantage of buying higher quantities of gold through ETFs without any taxation and are assured about the purity & delivery for 1 kilogram and above.
• On redemption: One can get the funds on redemption of Gold ETFs & not the physical gold.

4. Investment through Derivative Markets

A gold future means gold bought at the price and quantity decided today, at a future date. Advantage is one doesn't have to pay the full consideration now and the seller too need not part with the gold today. Gold future can be good form of hedge in rising gold prices as one need to pay the price today. However if the prices fall in future as compared to today's prices then it turns out to be a business of loss. There are certain exchanges like MCX, NCDEX who deal in gold futures.

Features of Gold Futures are listed below

• Good Investment Avenue - If one is bullish about the gold prices in future & vice versa.
• Investors need not put in the entire amount at the time of entering into the contract, only 5% of the transaction vale
• Trading in gold futures attracts a combined service tax and education cess at 12.36%, on the standard brokerage fee. Trading in gold futures takes place with the delivery or without delivery.
• When the delivery takes place, gains or profits is treated as a business income and taxed according to appropriate tax brackets. And, if the contract is settled without the delivery, proceeds are treated as an income from speculation and are taxed under short-term capital gains..
• Risk-averse investors or new investors should refrain from investment in futures as these are highly uncertain in returns.
• It is preferred by speculators & big investors with high risk appetite.

5. Electronic Gold (E-Gold)

It is a new way of investing in gold, invented and implemented by National Spot Exchange Ltd. (NSEL). Like ETFs, one can invest in E-gold through demat a/c and purchase as small as 1 gm of gold. This trading facility is available on Monday to Friday (except Exchange specific holidays) from 10.30 am to 11.30pm.

Features of E-Gold Futures are listed below

• Ease of trading - One can buy/ sell gold through the exchange easily from the comfort of home/office.
• Smaller quantity - Even a smaller quantity of 1 gm of gold can be bought. 1 unit=1 gm of gold.
• Lower Expense Ratio - The management expenses are lower compared to Gold ETFs. No making charges, no locker charges.
• When the delivery takes place, gains or profits is treated as a business income and taxed according to appropriate tax brackets. And, if the contract is settled without the delivery, proceeds are treated as an income from speculation and are taxed under short-term capital gains..
• Conversion in physical gold - Opportunity to convert the units in physical gold i.e. coins/bars in seamless manner. Purity: Gold purity is 99.5%
• Safety & Storage Since there is no physical gold involved it is a safer avenue for investment in gold. So there is no question of storage as well.
• To analyze the pros & cons & suitability of each of these above mentioned ways of investment in nutshell, following table can be referred to.

"Silver is set to retain the most volatile price action among metals over the coming year & best possible investment which can be hedged against inflation"

Over the past century, technological explosion has magnified the scale of its usage. Its demand is outpacing the supply and leading to large gaps, which is one of the reasons why silver prices have been zooming up. Since 2008, the price rise has been further propelled by the global economic uncertainty and the depreciation of the rupee due to the US economy outpacing the European Union.

Central banks and their governments across the globe have stopped selling their silver reserves in the world marketplace, thereby freezing the supply, which has caused silver to become more scarce and valuable. When there is lack of confidence in fiat money and the financial system, silver can be a hedge against inflation.

During global turmoil, central bankers devalue their currency and the best way to escape this is to stick with gold and silver. Also, mining of the metal is expected to become more limited due to scarcity constraints in the future.

Silver

Silver is a precious metal and an industrial metal, and both sectors are dynamic and volatile in nature, like other precious metals, it may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as a popular legal tender in many developed countries such as the United States. In 2009, the main demand for silver was for industrial applications (40%), jewellery, bullion coins and exchange-traded products.

Like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity, and demand fluctuations between industrial and store of value uses. At times this can cause wide ranging valuations in the market, creating volatility.

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver price ratio is often analyzed by traders, investors and buyers.