Do explore other ways to invest in gold
In the last one year, dollar return of gold has been approximately nil whereas in rupee terms it’s -4.5%
India’s obsession with gold is beyond a symbol of wealth and status. Acquiring gold is a goal for people of all backgrounds. There is a saying: “If India sneezes, the gold industry will catch a cold.” There is a tradition of purchasing gold on every auspicious opportunity such as Akshaya Tritiya. It is no surprise that people holds over 20,000 tonnes of the yellow metal.
Historically, it made sense for various reasons. A large majority of the population saved for their future in the form of gold as it was safe, easy to understand and store, and was considered the universal currency. But is buying physical gold efficient in today’s day and age?
Here is a low-down on efficient ways of investing and new gold products, which have higher benefits.

Physical vs dematerialised gold
Storing physical gold is risky and expensive. The chances of theft and losses are high and families spend their nights worrying about its safety. Whereas dematerialised gold means it is held in the electronic form by the depository on your behalf. It has many benefits, but primarily it’s safer, cheaper to store and hassle-free. It is similar to a bank account except that instead of money, it stores financial securities, including dematerialised gold instruments.

Why not to invest in physical gold
Apart from the fact that it’s risky and is subject to theft/loss, physical gold investments have other significant disadvantages. The bid/ask spreads are very high and investors end up paying more than the market price. When selling gold, seller will get a price that is lower than the market price. Also, one needs to understand that purity of gold is an issue and the buy/sell transaction will have to happen through authorised dealers where you can double check its purity.
The government has approved the BIS hallmarking scheme to verify the purity of gold. Since, most people invest in gold for the long-term, they prefer it to be in the form of jewellery. The making charges of jewellery and the cost of stones act as a deterrent to sell. For such reasons, it cannot be considered purely an investment. The cost of stones within the jewellery is usually worthless (no secondary market) and measuring their clarity is not easy or straightforward.

Sovereign gold bonds
The government wants to discourage physical investment in gold because it is burdensome on the value of the rupee and it contributes to the trade deficit as the value of imports is high (below 12 per cent of India’s total imports). Since gold has to be purchased in the dollars while importing it, it puts a downward pressure on the rupee. The most important thing is that it doesn’t benefit the economy in any way.
Hence, to find a way around it, the government introduced sovereign gold bonds, which is issued by it at a nominal interest rate of 2.5 per cent with a maturity of up to 8 years. It gives the government a cheap source of financing, if it succeeds. These bonds are attractive alternative to ETFs because they generate interest income while you hold it and you can also benefit from the rise in gold prices. These bonds can also be used as collateral for loans. Also, there is no management fees and hence no expense whatsoever.
To add icing on the cake, capital gains on these bonds are tax-exempt if held till maturity. The minimum investment amount required can be as low as 2 grams and a maximum of 500 grams per person.

Gold ETFs
When you invest in gold ETFs, you are allotted units to the extent of the value of gold. It’s a much better alternative than physical gold because its purity is standardised at 99.5 per cent. They can also be bought and sold without incurring additional costs that are usually associated with physical gold. For instance, the bid/ask spreads are much lower and hence you can save that cost. It is also hassle-free and simple to understand. You can invest in gold ETFs if you have a demat account with a stockbroker.
In comparison to sovereign gold bonds, ETFs are more liquid but don’t have the tax exemption benefit associated with sovereign gold bonds. However, there is no upper cap on the amount of money you can invest. Since its launch, ETFs have been a popular mode of investing in gold for institutions, younger and more informed people.

Gold companies
If you are optimistic about companies whose business models revolve around gold, then it makes sense to invest in them. There are a variety of industries, which can qualify for such investments primarily; gold refineries, jewellery and gold loans. There are a handful of listed companies, which have established themselves in these areas and continue to do well as India’s obsession with gold only grows stronger. While gold has not given any returns in the last one year, many gold companies have given a collective return of 44 per cent in the last one year. If you want to explore this, then you should explore thematic investing. Historically, equities have outperformed gold and smart investments have yielded handsome returns.

What you need to know
The price of gold is denominated in the dollar and is traded around the world. After it is imported into India, it is traded in the rupee within the country. Hence, to a large extent the price of gold depends on the value of the rupee. Let’s assume that the price of gold in the international market went up by 3 per cent and in the same duration the value of the rupee increased (the dollar reduced) by 3 per cent, then the net gain will be zero as the appreciation of rupee will have a negative effect on the returns. To get returns from your gold investment, it is important that the price of the rupee either remains stable or depreciates relative to the dollar.
In the last one year, the dollar returns of gold has been approximately nil whereas in rupee terms, it is -4.5 per cent. This is due to the rupee appreciation. If you consider the dollar dynamics, gold investment is an automatic hedge against rupee depreciation.
Another important fact to keep in mind is that import duties are factored into the price. If the duty is hiked then existing investors are sitting on a profit and vice-versa.
(The author is co-founder and CEO of FYERS, an innovative thematic investing platform)