Tuesday, November 8, 2011

How to Invest in Gold

   Form the time i had shown interest in gold April 2010 gold has been up almost 50% in a span of 1.5 years. This should be historical bull run for the precious metal in all history.Last article's aim was to show that gold gave better returns compared to inflation on a consistant basis. But a return of 50% in this period is by no means normal.Such a sudden spike has driven lot of people to consider gold of investment recently ( retail investers tend to enter at the tail end of any bull run). Widely used method for investing in gold are as follows
  1.  Traditional method of buying jewellery 
  2.  Buying gold coins ( from banks , dept of Post)
  3.  Gold ETF 
Lets see what would be optimal method to invest in gold.

  From investment point of view this is the worst method .
    • Can feel the aesthetic value of gold.
    • 5-25% more to paid for making charges etc depending on the intricacy of design. 
    • No universal rules ( most of charge charge cost of gold for stones weight too )
    • During small value purchases, consumers don't have negotiating abilities 
    • should take of safe keeping 
    • vat/sales tax should be paid over cost of jewellery
    • Wealth tax ( 1% for assets more than 30 Lakhs)
    • When we try to sell back returns from jewellery , we will take a hit of 5-25% 

Gold coins 
    • 24 Carat, 999.9 pure. Imported from switzerland (why the hell does it matter ? )
    • Distributed by banks , Dept of Post which can easily relied than Jewelleries
    • Tamper proof packing 

    • Atleast 10% premium ( due cost of distribution ) 
    • Price are not uniform . Vary highly between banks (see the table below)
    • Should take of safe keeping 
    • Price of lower denominations are very costly (some cases extra 10% costlier)
    • 1% VAT/Sales Tax over the cost of coin
    • Subject to Wealth Tax ( 1% for assets more than 30 Lakhs) 
    • Banks don’t buy back the coins.So you have sell back to jewellers
    • When we try to sell back returns from jewellery , we will take a hit on the 10% premium paid.

    Exchange traded funds from mutual fund house
    • Assured purity of 99.5%
    • No premium charges ( As there is no cost for distribution as it uses the existing stock market framework  )
    • No VAT / Sales Tax / Securities Transaction Tax 
    • No Wealth Tax 
    • Cant physically feel the gold
    • Easy to realize investment returns
    • Volumes are low 

Lets see the prices of various options on Nov 4

Price of Jewellery

                                          22 Ct      24 Ct
Dinamalar 2637      2820
Prince Jewellery 2640      2824

Price of Gold coins at various banks 

BankName Lowest Denomination Highest Denomination Price per gram Tax
SBI 6235(2gms) 150350(50gms) 3118 - 3007 exclusive of Value Added Tax/Sales tax.
IOB 6141(2 gms) 292774(100gms) 3071 - 2928 exclusive of Value Added Tax/Sales tax.
HDFC 8520 (2.5 g) 330620(100g) 3400 - 3306 including sales tax as applicable in Mumbai
Corp Bank 6221 (2 g) 289254(100g) 3111 - 2893 exclusive of Value Added Tax/Sales tax.
ICICI 3514 (1g) 60564 (20g) 3514 - 3028 exclusive of Value Added Tax/Sales tax.
BOI 12138(4 g) 146882(50g) 3034 - 2937 exclusive of Value Added Tax/Sales tax.

NAV of Various ETF 

ETF Name
Volume ( in Lakh Rs)
Goldman Sachs Gold ETF
Reliance Gold ETF
UTI Gold
Religare gold etf
ICICI Prudential Gold ETF

Conclusion : 
       Based on the pros and cons listed above the best option for investing in gold is through Gold ETF. 


  1. Capital Gains Tax:

    In case of physical gold and e-gold , the long-term capital gains tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs.

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