Gold has always been a critical investment avenue for investors. Not only does it act as a safe haven during the time of crisis but also has an aesthetic value attached to it. Considering the recent spurt in gold prices there has been a renewed interest amongst investors to own gold. And we know physical ownership entails high risk and storage costs. Thus, over time various other safe and cost effective investment avenues have evolved. Gold - Exchange Traded Funds (ETFs) and E-Gold are a few prominent examples. Here we explore which option is more suitable from the investor's perspective.
As investing through E-Gold is more cost effective (brokerage and transaction charges are less than ETFs) it is more appealing to both investors and speculators. Secondly, considering both these forms are an effective investment in paper gold one needs to consider the conversion convenience. It may be noted that E- Gold can be converted into physical gold for smaller quantities as well. However, ETFs have a denomination restriction for physical conversion. Thus, E-Gold option scores here.
Even the liquidity in E-Gold is far better when compared to Gold ETFs thereby reducing the impact cost of retail investors. Further, it may be noted that Gold ETFs are priced in Net Asset Value (NAV) terms. And NAV is impacted by various factors. Now, considering that Gold ETFs have the flexibility to invest some portion into money market instruments the tracking error is also high. As a result, ETFs may not mimic the actual prices of physical gold.
Nonetheless, it may be noted that ETFs have advantage over E-Gold due to differential tax treatment. Long term capital gains tax levied on ETFs is significantly lower. It also does not attract wealth tax. Further, it also reduces administration hassles as one does not have to open a separate demat account for investing in ETFs.
While both the options have their set of pros and cons, it appears that investing through E-Gold has an edge over ETFs as far as conversion flexibility and transaction costs are concerned. Further, E-Gold is also a better replica of gold prices. However, it may be noted that as the product is relatively new it may take a while to gain market acceptance. But once that is done E-Gold may emerge as a preferred alternative for investors over the long run.