How to invest in gold the right way

gold-coinIndians have an unexplainable love for gold. We can never have enough of gold. That is the reason jewellers go and announces various “auspicious day(s)” for buying gold. We also think that buying gold is a valid form of investment.

People always say that gold prices doesn’t always decrease (which isn’t exactly true if you look at historical prices). But Gold is an important asset class and everyone should have part of their investment made in gold.

Gold acts as a nice hedge against inflation as it increases along with inflation (mostly). So lets see what are the various forms one can buy gold in India.

Ornamental Gold

The truth is ornamental gold is never an investment. Because while we buy a gold jewellery, there are numerous extra charges which we have to pay for like making charges, wastage, etc. Sometimes, these all add up to even 30% more than the cost of the gold.

And when you go to the same shop to sell your jewels, they just give you money for the percentage of gold you have in the jewel. Thats right, all the making charges, wastage you paid is all your expenses and you don’t get it back.

Apart from that, most shops would want you to buy back some new jewels from them instead of giving you the cash. They would attract you with new designs and models and you would end up paying even more money from your pockets to get the new jewels.

Ornamental gold has an emotional value attached to it. People buy it for weddings or special occasions and wouldn’t want to sell it. The most that they can do is get loan by keeping the jewels as collateral and you would be paying extra money as interest. It isn’t that easy to convert gold jewels into money in an instant.

Gold Bars and coins

So how about buying gold as bars and coins. Most shops and banks/post offices sell 24 carat gold coins and bars starting right from 1 gram. They have a purity certificate and since it is in the form of bar/coins, they don’t have making charges/wastage. And they also assure you that, while selling back you would get the exact gold rate on that particular date.

So does that mean you can go ahead and buy it and store it in your safe and sell it when you need money? Not that easy. No bank or post office would buy back gold coins which they sold to you (even if it were just a few hours back). They just sell gold to you and their transaction is done. For selling, you would have to go to some gold shops and sell to them.

And what would these gold shops do? Right, ask you buy jewels from them instead of paying you by cash. Is there no way to get back money you “invested” in gold coins? You can, but you won’t get back that day’s gold rate. You would get only a discounted rate and so you are making a loss.

How else to “invest” in gold?

Now you are fed up and asking “How the hell am I supposed to invest in gold?”. There are two ways you can really invest in gold and get back money whenever you want to. Enter the world of Gold ETFs and E-Gold.

Gold ETF

ETF stands for Exchange Traded Funds which is a fancy way to saying “you give money to someone to help manage some security”. In the case of Gold ETFs, you pay money and buy N units (1 gram) of Gold. It is bought and sold like shares of a company in the stock market (NSE). Its all stored electronically in a special account of yours, called DeMat (Dematerialized) Account.

You pay the fund a small fees to manage your gold (though there isn’t much managing to be done). There is no problem of security, as all your gold stays in your account and cannot be opened/stolen by anyone else. The price of the gold ETF would track the price of a one gram 24 carat gold in the market.

There are many companies which sells Gold Fund and you can practically buy any one of them and you would have invested in gold. I would suggest the Gold BeES, because it is easy and can be bought directly from the NSE.

E-Gold

Then what is E-Gold? E-Gold is also an electronic way to buy and sell gold. Only difference is you would be buying Gold directly from the National Spot Exchange. You pay for whatever the price of 24 carat Gold was at the precise moment. No need for any fees to be paid to some fund house.

It is a good method of investing if you want to buy physical gold at a later stage. You can use the gold accumulated in your DeMat Account and buy jewels from the shop, without having to risk storing/safe guarding the gold in your safe.

Which form to buy?

For investing your money, always choose Gold ETFs or E-Gold. It doesn’t make a difference to both if you intend to stay invested in the long run. Both these are very liquid – meaning, if you suddenly want money you can tell your broker to sell X units of your gold and you would get back money immediately, without losing anything on wastage/impurity/etc.

But if you are buying gold for some wedding or as a gift to your wife so that she can wear gold to a function, you have no other option than to go and buy the gold jewels. But do remember that this money you spent to buy gold is an “expense” and not an “investment”.

Remember the difference between these and you would make sure you don’t “spend” more on gold and instead “invest” in it. Remember it is not advisable to invest all your money into gold too. There is the equity market where you would get much better returns if you are willing to stick around for the long term.

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