Personal Finance

Paper That’s As Good As Gold

Gold jewellery is far from losing its sheen. But it just won’t do for smart investing

It does not have to glitter to be gold. A shrewd investor knows the value of paper gold just as much.

But we, Indians, are still under the spell of the yellow metal. More specifically, gold jewellery. Even those without a savings bank account set great store by its glittering value. Its role as a symbol of wealth and social security in our multicultural society is not lost in either urban or rural India.

It helps that the gold’s value steadily increases, so what if it can’t beat inflation. The average gold jewellery buyers seldom look beyond the cultural symbolism vested in the ornaments, patting ourselves for our valuable ‘investment’, every time we channel our savings to buy more.

We end up paying a sizeable portion of our bill to the jeweller as making charges (anywhere between 5-25 percent), which cannot be recovered in a resale. If the need arises, even if we were to go back to the same seller for a buyback, there would be a further deduction of wastage from the price we paid the seller.

The sentimental value we attach to them can also hinder our ability to sell it. And, to store it, we either wrack our brains for ways to hide it in our homes or pay banks to store in their lockers, without a guarantee.

But investing in gold can still stand us in good stead, especially in highly volatile times. Given the current economic indicators, we might need a more dependable commodity such as gold to be part of our portfolio along with Indian markets-driven instruments. Gold’s price is governed by international macroeconomics, including the dollar’s movements.

If not jewellery, one can invest in (ie. buy and sell off when needed) gold in a host of other ways. Physical gold options include bars and coins, which promise more purity than jewellery. There are gold savings schemes offered by jewellers with a freebie thrown in when we encash translating into more gold jewellery.

Paper gold, on the other hand, bets on the price of gold to give us returns, such as sovereign gold bonds and gold ETFs (exchange-traded funds).

Much like jewellery, we lose money when we buy gold coins or bars. They are often 99 percent pure, but while buying we incur an additional charge and storing and selling them off come with similar strings attached to jewellery resale.

Paper gold, such as gold ETFs, has no entry costs. They don’t come with storage and safety hassles either.

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For gold ETFs, we need a Demat account. Owning and trading in gold ETFs units can be completely done online. These passive funds are traded on the stock exchange (NSE or BSE in India), with gold as an underlying asset. Hence, the funds track the benchmark price of physical gold (easily cross-checked) affording retail investors like us a transparent view.

With a gold ETF, we can start with a minimum of one unit or 1 gram of gold, and we can invest with systematic investment plans or with a lump sum.

Sovereign gold bonds are issued by the Central government intermittently, every few months, and earlier issues are available on the secondary market. Their redemption is not taxed and they earn an interest of 2.5 percent for the investor yearly. However, they mature after eight years.

The economic ups and downs since the global downturn in 2008 have proved that even gold is volatile. Investors, worldwide, turn to gold if large economies suffer a setback but drop it when recovery is in sight. Therefore, one must make their gold investment mainly through paper gold as a smart move and buy jewellery for use rather than as an investment.