1. Physical Gold:
Gold can be bought in the form of coins and bars. The coins come in different sizes (1 gram, 2 gram, 5 gram, 10 gram, 20 gram and 50 gram in India, 14mm, 22 mm, jewellery, etc. diameter in the US, commemorative $1 US$ gold, and various other forms). Bars are normally available in 100 grams. However, to cater to the need of retail investors, dealers in physical gold are willing to cut a part of the gold equivalent to the buyer’s requirement. The advantage of Gold Investment is that the gold is in the hands of the investor. However, there are many disadvantages to holding gold in physical form. It does not have utility value, can be lost (or stolen) and requires the investor to make arrangements for appropriately storing it. There can also be trust issues with respect to the quality of gold.
2. Jewellery:
One way to create utility value for physical gold is to convert it into jewelry. There is a huge demand for gold jewellery, which is actually a manifestation of the demand for holding gold as a store of value. More than 60% of the demand for gold is towards jewellery. Apart from the other disadvantages of holding physical gold, the cost of holding increases on account of high making charges and wastage taken by jewellers. The resale price is also lower as the jeweller deducts a small commission on the prevailing gold price.
3. Gold Investment in Mutual Fund and Gold ETF:
This is increasingly becoming the mode of holding Gold from an investment perspective. They allow investors by units of a gold fund on the stock exchange. The gold fund is passive in gold investment. Let us understand this with the help of an example.
M/s Glitter Asset Management company comes up with a Gold Fund, wherein it offers units to investors at an initial price of Rs.10 per unit. A person willing to invest Rs.1000 in gold can buy 100 units of this fund while a person willing to invest say Rs.50,000 can buy 5000 units. Totally, the fund collects Rs.100 crore from all investors, issuing 10 crore units. Let us say, the price of gold on that particular day is Rs.2,50,000 per kilogram. The Gold fund buys 4,000 kgs of gold. In the next month, gold prices shoot up to say, Rs.275,000 per kilogram. This means the value of gold held by our fund goes up to Rs.110 crores (4000 kg *Rs.275000 per kg). This translates into the value of 1 unit of the gold fund increasing to Rs.11 (Rs.110 crores of fund value / 10 crore units). Thus, a person who bought only 100 units of this fund sees an appreciation of 10% in his portfolio. If he wishes to sell his investment, he can redeem the units of this gold fund with the Asset Management Company at the prevailing NAV of Rs.11 per unit.
Thus, a gold fund facilitates small investors’ gold investments. Since the fund is actually buying and selling the gold as well as holding the gold, there are no worries pertaining to the quality of the gold, storage, or the risk of paying more (due to making or wastage, etc.) or selling lower ( deductions). However, a small asset management fee has to be paid to the fund.
Gold ETFs are Gold Funds that are exchange-traded funds. Investors can buy/ sell gold on the stock exchange by buying/selling the Gold ETFs. Gold ETFs have all the advantages of a gold Fund. However, investors need to open a Demat account for holding gold ETFs.
4. E-Gold
E-gold can be bought on a commodity exchange through a member of the exchange. Each unit of e-gold is equivalent to one gram of physical gold and is held in the Demat account. E-gold is totally different from Gold Investment. Like gold ETFs, e-gold units are fully backed by an equivalent quantity of gold kept with the custodian. The difference between a gold ETF and E-gold is that E-gold can be converted into physical gold at any time through a process of re-materialization.
5. Shares of Companies dealing in Gold
Shares of gold mining companies or companies that stock gold for trading purposes can be an alternative way of benefiting from the increase in the value of gold. Investors, in this case of gold investment, are not only optimistic about the prospects of gold prices going up, they are also having full faith in the management of such companies.
6. Sovereign Gold Bonds
The government of India is offering sovereign gold bonds at regular intervals. These bonds not only offer the investor returns equivalent to holding gold but also offer a nominal interest rate (currently 2.5% p.a.) on the investment. Since money is lent to the Government of India, it is absolutely safe. There is no need to open a DEMAT account. Liquidity comes in the form of trading on the exchange. These bonds are exempt from capital gains tax if held to maturity. However, it is difficult to have a systematic investment plan unless one is an active and alert investor.
