As good as gold

It’s turning out to be a must have asset class. Gold has been hitting record highs and is currently trading at around $874 (Rs 34,960) per ounce (on January 18). Gold has begun its long-term bull run and has managed to beat longterm inflation.

All that glitters You should ask the following questions when buying gold: When should you buy gold? Timing is not an issue. With rising competition for limited gold supplies, small investors could get crowded out later. Is this a long bull run for gold? Many experts think so, thanks to its gradual linear rise from 2001 and its undiminished allure as a hedging tool. A short-term correction is expected, after which the metal is expected again to inch upwards. How much gold should you have? About 10 per cent or more of your assets can be in gold, depending on your analysis of the current economic, financial and political situations. Are gold futures a good idea? Exchange Traded Funds and gold coins are better investments. Gold futures are speculative, the exposure is leveraged and pricing movements are exaggerated.

The yellow metal might not give superlative returns over the long term—although it has done that in recent times—it merits investment attention as a hedge against global risks.

“Around 10 per cent of one’s portfolio should comprise gold in order to hedge against any unwarranted calamity,” says K.V.S Manian, Head, Retail Bank-ing, Kotak Mahindra Bank.

At the current price of Rs 1,125 per gram, an investment in gold can pay off over the long term. Says Vijay Talreja, Director, Riddhi Siddhi Commodities: “Gold prices are currently very high, but if you have a long-term perspective, beyond 2009, you can go ahead—though shortterm investors could await a correction and enter at Rs 1,050 per gram.”

There are many factors that make gold look attractive today. It is a hedge against the US dollar and is closely linked to the depreciating greenback.

But some contend that gold might not rise too much if the US economy recovers. Markus Schomer, Managing Director, Global Economic Strategist, AIG Investments, who paints a better future of the American economy, says: “The US economy should recover by April.

The dollar will, thus, recover and, hence, gold prices could dip to as low as $650 (Rs 26,000) per troy ounce.

But if inflation in the US is not countered adequately gold could again rise in January 2009.” It’s easy to buy gold today. Investors can choose from three options—Exchange Traded Funds (ETFs), the commodity exchange, or from your jeweller or banker as imported bars or coin.

ETFs are mutual funds traded on the stock exchanges, and investors can buy and sell the units through the exchange. “There’s greater safety in holding gold in demat form compared to keeping it physically in a locker,” says Benchmark Mutual Fund’s Executive Director, Rajan Mehta.

The tax treatment on ETFs is similar to that of debt funds, while physical gold purchases could lead to wealth tax issues.

For those who don’t have broking accounts and are opening one specifically to buy gold ETFs, the exercise could turn out a shade more expensive than purchase of gold coins at a premium of less than 5 per cent. Such customers may, instead, want to consider renting small lockers at a bank if they don’t have one.

Opening a brokerage account, a demat account, keeping a minimum deposit with broker plus annual charges means that a new investor may have to shell out almost Rs 1,000-2,000, but this varies between brokers.

Get the gilt edge What are the various options when buying gold, and how much do they cost? Mode: Gold ETFs What is this: Mutual funds backed by gold assets Charges involved: Initial deposit with broker, account opening, demat, and other charges; fund management charge of 1 per cent annually. NFOs cost more Who should invest: Preferably those who understand stock markets, and have brokerage and demat accounts Ease of buying/selling/keeping: Entry process is cumbersome, but selling is easy Mode: Gold coins through bank What is this: Coins sold with guaranteed purity Charges involved: Premium of as much as 15 per cent; locker charges extra Who should invest: Anybody with funds and a PAN card Ease of buying/selling/keeping: No buyback from banks and ETFs and heavy premium loss if sold to jeweller; gives satisfaction of possessing real gold Mode: Gold coins through jeweller What is this: Coins sold through jewellers; purity and certification may be issues Charges involved: Premium is much lower than banks Who should invest: Anybody with funds Ease of buying/selling/keeping: Buyback from jewellers without much loss of premium; gives the satisfaction of possessing real gold Mode: From the commodity exchange What is this: Have to go for the riskier futures route Charges involved: Minimum Rs 10 lakh investment, VAT issues on delivery Who should invest: Not recommended for the general retail investor Ease of buying/selling/keeping: Riskier route; could result in losses or gains; time lag

Additionally, brokerage is charged when you buy or sell ETF along with related taxes. A monthly demat charge plus a 1 per cent deduction on your ETF value every year as fund management charges will be a running expense.

An investor will, however, not get physical gold if he chooses to rematerialise his paper units, as mutual funds can’t provide the gold due to logistics issues. the redemption is done in cash. says benchmark mutual fund’s mehta, which pioneered gold etfs: “it is not possible to redeem gold in physical units, as it entails its own quality and cost issues. besides, there is vat levied by different states for physical purchase and that complicates the matter further.”

You can also buy gold bars or coins. The cost could increase if you buy coins. On the other hand, you can face storage issues when buying physical gold, unlike an ETF, which is like a share certificate.

Your neighbourhood jeweller is a good option, if the gold comes with a purity certification. While you have to store the gold jewellery in a safe place, at least there is no fund management charge of 1 per cent or entry loads ranging from 2.5 to 4 per cent.

Several banks sell gold coins, but charge a premium over the prevailing price, depending on the size of the coins. For instance, when gold was around Rs 1,135 per gram on NSE on January 10, the price of a gold coin at Kotak Mahindra Bank was Rs 1,314-1,341 per gram, depending on its weight.

Jewellers don’t charge this, though you have to fork out making charges, which are not applicable in the case of imported coins.The Gold Club of Chennai (GCC) jewellers offer certified gold in tamper-proof packs certified by WGC.

For example, on January 10, GCC gold coins cost Rs 1,200 per gram uniformly across various denominations, (when the ETF was at Rs 1,143 per gram and banks were selling at Rs 1,330 per gram). GCC has 150 leading jewellers in Chennai and it plans to expand operations into other states.

All in all, the sheen is back in gold. Investors will do well to buy the metal on dips. A small diversification of your portfolio to include gold can pay off handsomely over the next couple of years.