Part 1 - Physical Gold, Digital Gold and Gold ETFs
Part 2 - Gold Mining Stocks, Gold mutual funds and Sovereign Gold Bonds
Why invest in gold at all?
Gold has been the symbol of wealth and prosperity in India for many centuries now and is widely believed by experts as well as the average investor to be one of the most powerful vehicles of investment, predominantly among Indians as well. The performance of gold has comfortably beaten that of stock markets or real estate not just in India, but in most parts of the world. Gold is among the best assets to ensure your savings don't get eaten up due to inflation.
The main reason why it's still very popular to invest in Gold is to diversify one's portfolio as it can also act as a hedge against the potential volatility of equity investments as well as inflation. While showing lower volatility levels, gold has also historically shown an inverse correlation to the equity markets, i.e., gold prices start rallying during downturns in the stock markets as uncertainty in economic downturns causes investors to park their money in more tangible assets like gold.
In this article, we will cover the basics of the vehicles to invest in gold and some precautions and warnings while deciding how to go about it.
Since the olden days, the conventional way to invest in gold was to buy physical gold, like coins, bars, jewelry, etc. While there have been newer and more effective ways of investing in gold, which will be covered soon, traditional investors still prefer buying physical coins, bars, jewelry, etc.
The main advantage of having gold coins as opposed to jewelry is the ability to purchase gold in the lowest denominations possible, with some gold companies even offering 0.5 gram 24-carat gold (also called 24KT, the purest form of gold with 24/24 parts of gold, as opposed to, say 22-carat gold containing 22/24 parts of gold and 2/24 parts of zinc or silver) at nominal prices. Jewelry, however, provides additional value as a wearable item, although it can be more expensive to purchase, store and maintain. Ownership of jewelry provides the most enjoyable way to own gold in form of a beautiful piece of art, even though it isn't the most profitable from an investment standpoint.
There are a few key limitations of investing in physical gold that makes it an unconvincing investment vehicle compared to newer ones. These limitations include the expensive cost of purchase, storage expenses including any gold insurance, and inconvenience to sell this gold due to possible impurities (even in 24-carat rated gold) and the requirement of origination and purity certificates.
To overcome these limitations, digital options for gold investments including vehicles such as Digital Gold, Gold Mutual Funds, Gold Exchange Traded Funds (ETFs), Gold Mining Companies, and Sovereign Gold Bonds are recommended to be considered.
The only major difference between physical gold and digital gold is that instead of buying and storing physical coins or bars of gold, you pay the equivalent amount of physical gold to a company, which in turn purchases an equivalent quantity of physical gold and store it under your name in physically secured vaults. In essence, you are outsourcing the task of storing your gold to a company for a slight fee, while also overcoming most of the difficulties associated with physical gold.
All you need is internet access with mobile banking for investing in digital gold anywhere.
However, there are certain disadvantages associated with digital gold as well:- The biggest one being the lack of an official government-run regulatory body (as of now) like the RBI or SEBI. Other than that, certain companies may offer you only a limited storage period, after which you may be required to take physical delivery or sell the gold. This makes practical sense as these companies will have to keep getting customers to sustain their business, and there is only so much gold storage that each company can afford.
Gold ETFs (Exchange Traded Funds)
Gold ETFs, similar to REITs or Nifty ETFs like Nifty BeEs, are like buying proportional ownership in a collective vault of gold without having to store physical gold. Unlike digital gold, you are not required to invest completely in one coin or bar of gold. Like REITs where you can have shared ownership of one piece of land, gold ETFs allow you to have a proportionally shared ownership as per your convenience. One can invest in Gold ETFs using a SIP as well if they cannot buy their preferred amount at once.
An investment in Gold ETFs will require a Demat account. Like with all transactions requiring a broker or an external agent, your investment in a Gold ETF will involve brokerage charges. Apart from investing, these are also the most preferred vehicles to trade intraday or swing with the prices of gold.
While the value of Gold ETFs change directly with the change in the price of gold, vehicles like stocks in Gold Mining companies, Gold Mutual Funds, and Sovereign Gold Bonds do not directly change with change in gold prices, and they will be covered in more detail in 'How to invest in gold for newbies - part 2'