Tuesday, December 30, 2008

Gold as an Investment

The concept of buying/holding Gold has been followed for ages. Gold has been one of the most sought after precious metals for generations and people have been crazy about owning gold always. In olden days the amount of gold possessed by a king signified his power. In the modern times the amount of gold in the reserves signifies the strength of a country's economy. It is an unsaid truth that Gold symbolizes wealth.

Gold as an Investment option is very attractive. When I was in my school my mom used to buy 10 grams of gold at the price I get her 1 gram now. That is how much the price of gold has gone up in the past 10 years. Also, gold is a limited resource. In India especially we do not have many gold mines that have been able to consistently produce as much gold as some nations around the world are producing. So considering these 2 factors Gold is a very attractive and a comparatively safe investment option.

What kind of returns you can expect from Gold?

The typical returns from Gold would range from somewhere around 10% or even more year on year. The amount of increase in the price may vary based on a variety of reasons but the consistent upswing in the gold prices is happening for years and would continue. Also it is a safe investment option where your gold is worth as much as the price of gold in the international market. It is not as risky as the stock market and hence the risk of holding gold is very minimal.

What affects Gold prices?

The price of gold is ultimately driven by the Supply & Demand theory. When the demand for gold exceeds the supply the price goes up. Yearly 2500 tonnes of gold is mined all around the world and the demand for gold is approximately 3500 tonnes. This means the demand for gold is a 1000 tonnes more than what is being mined all over the world. This translates into a steady increase in demand as well as the price of gold.

In general gold becomes a very favorable investment option during some situations like Economic Crisis, Depression, Recession etc. During these periods the returns on investment on other forms of investments like Stocks, Mutual funds, Real estate etc is negative. During such times the demand for gold goes up heavily. People take out their investment in other avenues out of fear of loss and invest into safer avenues like Gold or bank deposits. This causes the price of gold to go up drastically. The price of gold per 10 grams has gone up by nearly Rs. 1000/- in the last 6 months.

Methods of Investing in Gold:

The various methods in which one can invest in Gold are:

1. Bars

The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold "over the counter" of the major banks. Alternatively, there are bullion dealers which provide the same service. Bars are available in various sizes, for example in Europe these would typically be in 12.5kg or 1kg bars, although many other weights exist, such as the Tael, 10oz, 1oz bar, 10g, or 1 Tola.

Gold bars can be held either directly (i.e. held directly by you or in your own safe) or indirectly (held in a vault on your behalf). Banks in Switzerland offer this service of holding gold in Vaults on your behalf.

2. Coins

The most common way of investing in gold is by buying gold coins. These coins are available in jewelery shops all over the country. They come in weight ranges starting from 1 gram and are usually in the sizes of 1g, 2g, 4g, 8g. This is ornamental 22 Karat gold that is bought and sold at the price of gold in the international market.

Of late many banks in India are selling gold coins with certificates of purity and genuineness.

Note: The coins sold by banks are 24 Karat gold. They are sold at a premium when compared to the market price of gold because of the cost involved in packaging and certification of the gold. Most importantly banks would not buy back these gold coins. You would have to sell them at the nearest jewelery shop. You might lose a little money in this selling process.

3. Exchange Traded Funds

Exchange Traded Funds are the latest means of investing in Gold. Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London, New York and Sydney. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was lunched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold. Due to costs, the amount of gold in each certificate is now slightly less. They are fully backed by gold which is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market.

Many investors who wish to hold gold on a long term basis find the Exchange Traded Fund method to be expensive as annual costs can range from 0.40% to 0.50%. For investors holding gold over the long term these costs add up. The major difficulty is that the costs are deducted as a reduction in physical bullion held. Thus the investor not only pays each year but loses the future performance of the bullion that has been deducted.

Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. Economies of scale, liquidity, and ease of purchase and sale make ETFs an increasingly popular method of investing in gold.

Benefits of Investing via Gold ETF's

1. You can buy quantities as small as 1 gram
2. You can buy them at the convenience of your home/office. All you need is a system with an internet connection and a valid DEMAT account
3. You need not bother about safeguarding your gold. The ETF provider takes care of it
4. You can sell it on any working day when the markets are open

UTI Gold Exchange Traded Fund

On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSE: GOLDSHARE) on the National Stock Exchange of India. The objective of UTI Gold Exchange Traded Fund is to endeavor to provide returns that, before expenses, closely track the performance and yield of Gold. Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be credited to investors’ demat accounts.

Furthermore, there are many more ETF's HDFC Gold ETF, ICICI Gold ETF, Benchmark GoldBees etc are gold based ETFs that invest in gold and can be bought and sold as shares.

Happy Investing...


  1. hi anand it was quite informative article...can you compare the cost of buying and selling gold etf vis-a-vis buying and selling physical gold...

  2. @ Deepak

    The cost of buying a gram of gold through ETF and physical gold is approximately the same. The only major difference being the fact that you need not bother about the safety of the gold you purchased. Otherwise - if cost is a factor both are almost the same. not much differences in price

  3. hello sir. thanks for the article. is SBI gold etf scheme is still open or closed? i understand under this gold ETF we are buying/selling in through stock exchanges and price of gold dependent on international gold market price. right? also share market up/down will have any impact on gold etf?

  4. @ Venkat

    Venkat - all ETFs buy only solid/physical gold. The price movement of the ETFs will depend only the movement of the international gold price. So, whether the stock market is going up or down will not have any impact on the gold price

  5. Anand,

    Is Gold ETF for SBI is same as this I believe http://www.sbimf.com/Products/FundofFundSchemes/SBI_Gold_Fund.aspx# otheriwse kindly let me know.


    1. Jacob - This SBI Gold Fund invests in ETF Schemes. It is a fund of fund and not a gold ETF. The scheme in which it proposes to invest - SBI GETS is a gold ETF.

      This scheme is a proper Mutual Fund and not an Exchange Traded Fund. The MF is going to invest in an ETF based on the amount you invest.


  6. Anand,

    I did some googling and found the pros and cons of gold etf. In one such site it is mentioned that
    "Another drawback with gold ETFs is liquidity; some ETFs are illiquid, which impacts their buying and selling flexibility. Hence, investors should consider this as a factor while investing in gold ETFs and should stick to funds that are liquid."

    How far this is true and this cannot be liquidated?


    1. Jacob,
      The point highlighted in this article is perfectly valid. If the scheme you select has a lock-in period or is not listed in an exchange where it can be bought and sold freely, then there are chances that it is not so liquid and hence you may not be able to sell it when you feel like selling it.

      This is something that needs to be considered before buying the ETF Scheme. However, majority of the top gold ETF schemes in India are very liquid


    2. Thanks Anand for your valuable information.

      I believe the following is Gold ETF http://www.icicipruamc.com/OurFunds/FundDetails.aspx?FundID=305 and this could be liquidated very quickly. Besides is this a good time to invest in Gold ETF?


    3. Yes, you are right. This is a Gold ETF.



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