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Where do you keep your gold? - Views on News from Equitymaster
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  • Sep 7, 2012

    Where do you keep your gold?

    In our previous articles, we discussed the pros and cons of investing in gold. We then talked about one way of investing in gold, i.e., physical gold. We discussed the merits and demerits of each way. But one thing that was common to all of them was the storage and insurance of holding gold in its physical form. The costs involved can eat away the gains. And not all investors like that. So the next best way is to invest in the non-physical format of gold. And this is exactly what we intend to discuss in this article.

    Investing in non-physical gold

    This can be done in either/ all of these ways-

    1. ETFs - This is one of the most talked about ways when it comes to gold investing. The exchange traded funds or the ETFs. Conceptually, an ETF is a stock like security. It is traded on the stock exchange like any other stock. And in the same way that a stock has a company behind it, an ETF has the underlying asset behind it or in this case gold. The ETF owns the gold which is deposited in a bank vault. Therefore the value of the ETF security is equivalent to the gold being held by the fund.

      The good part about holding an ETF is that it frees an investor from the innate hassle of holding and storing gold. The securities are held in the investor's demat account like any other stock. And like most stocks, the liquidity is high which means that the investors can buy and sell at a moment's notice. The best part is that the movement of the investment value mirrors the performance of actual gold. And the investor can invest in smaller amounts as well. Something that is difficult when it comes to buying physical gold.

      But the drawback is the fees involved. The ETFs do charge a fee which is a percentage of the total investment made. In addition to that, some ETFs also charge for storing the underlying gold in the bank vault. But these are still lower than what one would pay for storing physical gold. Despite the difficulties, ETFs still provide a convenient and easy way of investing in gold.

    2. Gold company stocks - The second way to invest in gold is the indirect way. The investor can invest in the stocks of companies whose underlying business is gold. This could be through owning gold mining or gold refining stocks. The underlying assumption in investing in this way is that the fortunes of these companies and hence their earnings are dependent on and mirror the performance of gold. Herein lies the merit as well as the demerit of this form of investment. The merit is again that it reduces the hassle of investing in physical gold.

      But the demerit is that the company's performance maybe very different from the performance of gold itself. Every company has its own fundamental strength and weakness. In addition to this there are so many other things like macro factors, company's management, its vision, its cost structure, etc that can affect its performance. For example in case of a gold mining company, it may not get the license or the discovery may fall short of expectations, etc. Therefore the performance of the stock may not necessarily be in line with that of gold itself.

    3. Gold derivatives - The commodity exchange has derivative products where the underlying commodity is gold. Futures and options provide another way of investing in non-physical gold. What you need is an account with a commodity broker and you can get started. Like any other account there are brokerage and account charges involved but like any other derivative, the potential for gains (and of course losses) is high too. The charges tend to get offset by the gains.

      The problem with investing in gold derivatives is the quantum of money required. Derivatives usually trade in lots which mean that the initial investment amount required may not be for all small investors. In addition to this, the liquidity of some type of contracts maybe low. As a result the desired contract may or may not always be available.

    4. Other ways - Other non physical forms of gold could be something like a fund of fund. This is a mutual fund that holds other gold related funds as its units. Another way could be to hold a global gold fund that invests in the stocks of gold companies listed in global exchanges. Gold certificates are also an option. However these certificates are currently not offered in India. But it is proposed to be introduced soon.
    Overall, investing in physical gold works well for investors who prefer to hold on to something tangible. But for those who wish to avoid the hassles of delivery and storage, the non physical form works well too. The advantages of non-physical gold are aplenty. They provide an easy way of investment for even small ticket investments. The liquidity is high and the performance is similar to that of gold. But unlike physical gold there is nothing tangible that you have in hand.

    With this we have given you the various ways in which you can invest in gold. So go ahead and invest if you want to. Happy investing!



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