Why invest in Gold?
Everybody knows that, Indians are the largest buyers of Gold in the world. But there is a catch. Most of our gold purchases are in the form of ornaments. While, this will make you look rich when you wear them, as a financial investment, ornaments are not good. The extra amount that the jewelery charges for design, making charges etc. are very high. If you want to sell it later, you have to bear some more charges.
Gold is considered as a hedge against inflation, mostly moving in tandem with rising inflation and inversely with the dollar. Gold is an effective portfolio diversifier because of its low to negative correlation with other asset classes. It is an established fact that in the past 400 years, the basket of goods and services that gold could buy over the period has remained more or less the same. Testing times like Global economic meltdown or war etc will have huge negative impact on other asset classes like equities, but will have a positive impact on Gold prices. This is because the demand for gold goes up as a safe haven for parking funds.
Global demand for gold is around 1000 tonnes more than the supply. There are around 400 gold mines operating all over the world, but the annual production is almost stable at around 2500 tonnes per year for the last 5 years. In most industries, rising demand kicks off an increase in supply that brings the prices down. But in the case of Gold, the supply is almost stagnated with no major recoveries of gold. Even if a new mine is discovered, it will take around 10 years for starting the commercial production! Analysts feel that the production will remain flat for the next few years and can drop later.
India is leading in the consumption of gold with yearly consumption of around 600 tonnes. Domestic production is around 2 tonnes only and the balance is met by imports.
The traditional, age old ways of buying gold have been like gold ornaments from jewelers or coins, bars, biscuits from banks or jewelers. However, since the last few years, new ways of investing in gold have emerged. These include buying gold Exchange Traded Funds (ETF) and the latest one is E-Gold. We will discuss E-Gold in detail.
What is E-Gold?
The National Spot Exchange Limited (NSEL) has introduced E-series products in commodities. To start with, they have launched E-Gold and E-Silver. Trading in E-Gold has been on since March 2010. E-Gold units can be bought and sold through the exchange (NSEL) just like shares. Here one unit of E-gold is equal to 1 gram of gold. For long term goals like accumulating gold for children’s marriage, retail investors can buy E-gold in small quantities in their demat account over a period of time. Once their target is achieved, the individual can take physical delivery of gold through the exchange from the delivery centres. By buying gold in electronic form (demat), the individual need not worry about the purity of gold, storage costs and the Safety. If the individual has bought e-gold only for investment purpose and does not need to take delivery of physical gold, then he can always sell the E-gold units and encash them.
E-gold is treated like physical gold for taxation purpose. If you want to get the benefit of long term capital gain tax, you should hold it for more than 36 months, where as it is 12 months in the case of gold ETFs.
Gold can occupy around 10% of your total portfolio and investing through E gold will be a better option. This will help you to accumulate gold in smaller quantities over a period of time and take delivery or sell, as per your requirement.