Nov 21, 2008

How to Invest in Gold: 5 Different Ways

AFTER HAVING DISCUSSED its importance in the asset allocation, you would surely like to know how to invest in gold.

There are various ways to participate in the gold rush. In India, the predominant one is the jewellery. However, the most appropriate method of buying or getting exposure to bullion depends upon your purpose and requirement.


Broadly speaking, there are five ways to invest in yellow metal:

1. Gold Jewellery
The largest source of demand for the precious metal is for the purpose of gold jewellery. However, the high prices curtail the spending on jewellery and increase the investment demand for the yellow metal.

If you want to buy gold for consumption (i.e., jewellery for wearing purposes) rather than investment purposes, you can go for it. But considering jewellery as an investment is not prudent as its buying and selling involves labour and design charges and is usually made of 22-carat (and not 24 carats, the purest form). Besides, in case you want to sell, most jewellers only allow gold exchange and do not pay cash against your gold.


2. Gold bars and coins
The best way to invest in physical gold is to buy gold bars and coins. You can buy them from local jewellers but the doubt about the purity remains. The best way is to buy from RBI authorised banks although it cost you a little bit more(Gold bars/coins sold by banks are marked up by 5-15% above the market prices) and banks usually do not buy it back from you. However, you can be assured about the quality. The other alternative is to buy from a trusted jeweller.


3. Gold Futures
You can also take exposure in yellow metal through commodity exchanges (MCX and NCDEX), where you can buy (or sell) gold futures. Since October 2003, futures trading in gold and silver is allowed. For catering to the needs of small investor, the Multi Commodity Exchange (MCX) has specially launched gold mini contracts (with a minimum unit size of 8 grams) in May’08.

But, commodity futures are basically meant for hedgers and speculators and not for small investors because futures are highly leveraged investments and therefore carry high risks. In the words of Warren Buffet, the greatest investor in the world, derivatives (which include futures) are financial weapons of mass destruction.


4. Stocks of gold mining companies
Another indirect way of profiting from the gold rush is by investing in the stocks of gold mining companies. While the price of gold is driven by simple demand and supply economics, the price of stocks of gold mining companies depends upon many other factors besides company fundamentals and also gives you leverage on the gold price (multiplier effect on profitability with the rise/fall in gold prices) and are therefore more risky.

Since no gold mining company is listed on Indian stock exchanges, you have to route your investments through gold mutual funds which invests in equity and equity related securities of gold mining companies. Right now, there are two gold funds available in India: AIG World Gold Fund and DSP ML World Gold Fund. As there is no Indian gold mining company, the gold funds invest in world gold funds that further invest in gold mining companies across the world.



5. Gold ETFs
Traditionally, gold jewellery has been the preferred mode of investing in the gold but of late gold ETFs (Exchange-Traded Funds) are gaining in popularity. Like other ETFs, these also follow passive investment strategy i.e, the fund simply buys and holds gold on behalf of the investor without actively managing it.

While the returns from gold mining stocks depend upon the financial performance of the company, the aim of ETFs is to provide returns as close as possible to that given by the physical gold.

In India, currently five Gold ETFs are available viz Benchmark Gold BeES, Kotak Gold ETF, UTI Gold ETF, Reliance Gold ETF and Quantum Gold ETF.

In next part, we will see how Gold ETFs are the best way to invest in gold and scores over all other alternatives.


Also see:
1. Why Gold ETF is considered as the best Way to Invest in Gold?
2. How to Invest in Best ELSS?
3. Investing in Fixed Deposits: Interesting Information

6 comments:

  1. Hi,

    if banks dont buy back gold coins / bars - who does?

    Thanks.

    ReplyDelete
  2. Hi Lazy,

    You can sell them to any jeweller.

    ReplyDelete
  3. When the jeweller can get the same amount of gold from his wholesale dealer, why would he wants to buy the same from us ? if he would want to really do so then I am sure he would quote a value substantially lesser than his procurement cost !
    would that be worth a sell ?

    ReplyDelete
  4. AnonymousJune 22, 2010

    if we invest equal money all the options???where we will get maximum returns???

    ReplyDelete
  5. Hi Fisher,

    You are an Angel. I just can't stop reading this blog's. They are informative, logical and based on facts and true to the core.

    Your suggestions have triggered by thought process in the right direction and its time, that i have a closer look at my investments and lifestyle.

    Do you plan to write something on how to make married life more successfull?

    I read Men are from Mars and Women are from Venus..quite useful..but thats not sufficient i guess.

    Regards
    Manish

    ReplyDelete
  6. A very well comparison between various modes of investment in gold. In India, gold never loses its sheen and people are always game for investing in gold, but unfortunately unaware of how to go about it. Most of them end up buying jewellery, which in my personal opinion should not be the ideal way of investing in gold;gold jewellery must be treated as consumption asset and not as an investment asset. Better ways of investing in gold are present, like Gold ETFs, Gold Saving Funds, E gold etc.which involve low costs as well as many other benefits. Depending on one's own preference, one can select the best mode for themselves. This article helps investors in distinguishing the features of each and thereby helps in taking correct investment decisions.

    ReplyDelete

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