ALL THAT GLITTERS IS INDEED GOLD

Off late, I have observed that many investors are keen to know about the pros and cons of investing in Gold and Gold ETF’s from the long term perspective

I have done some in depth analysis on this issue and I am delighted to provide you with my brief opinion on Gold/Gold ETF’s which is given below :

• It's very simple. Gold is money. But gold does not generate any return. It simply preserves purchasing power

• Dollars, Euros etc are simply currencies that competes with gold

• If people become less confident in dollars [ the worlds No.1 Reserve Currency ] gold goes up in paper terms – precisely what is happening now, because of inflation, enormous fiscal deficits, Eurozone crisis etc

• As the global community loses faith in the US economy and consequently loses faith in the dollar as the world’s reserve currency, then Gold will take centre stage and then many countries will park their reserves not in dollars but in gold – and that’s going to push up the price of gold to even higher levels!

Incidentally, as of now 7.06 per cent our country’s reserves are in Gold including 200 MT purchased on 31 November 2009 from IMF.

So, friends, it’s a great decision if you are planning to go for SIP type of investment in gold is indeed the right way forward. Go right ahead but be cautious as gold has already run up a lot and try to limit your total exposure to Gold [ physical + ETF’s ] in the range of 5 – 10 per cent of your total portfolio.

We also need to pay attention to what the renowned Dr.Doom’s/Dr.Marc Faber[ best known for his ‘Gloom Boom and Doom Report’ ] has to say about Gold :

“ Dr. Faber is a firm believer in owning assets in the physical form and advised people to park 5% of their investments in the yellow metal. At current levels, he felt that gold was not overpriced. Faber believes the central banks in the world will continue to print more money and there will be more quantitative easing and stimulus packages in the US. The fiscal deficit there will not come down much, so on that basis, gold has a place in every portfolio. Dr. Doom predicts a dollar tumble over the next decade and suggests to BUY physical assets - realty, gold, commodities.”

And more from Dr.Doom : “ Heavy borrowing by the US government will further weaken the dollar and there are already doubts about dollar’s status as a global currency. He opined that going forward, central banks especially in Asia will be converting their dollar reserves into gold.”


Another factor driving gold is Chinese demand. China holds just 1.6 percent of its currency reserves in gold, compared to 70 percent by the U.S. and a 66 percent allocation by Germany, according to Credit Suisse. Given the Euro destabilization and already huge US dollar reserves, China may look to Gold as a way to hedge it’s foreign reserve holdings.


A ] PHYSICAL GOLD - COSTS AND RISKS INVOLVED

1. Storage – While you may consider buying physical gold from your family goldsmith [ just as we trust our family doctor ] yet the risk of security vests with you, in which case you have two options :
• Keep it in your house in a fire proof safe [ this, none the less entails spending sleepless nights when you lock your house and go on a long holiday – nothing can be guaranteed in India- house breaking takes place even in the best security backed residence complexes ]
• Keep it in a bank locker, in which case you may be able to sleep better but with the additional costs involved for sleeping better in terms of the bank charges.

2. Insurance –
Here again, you have to take a calculated risks. Insurance is such that it can make even the best brains in this world to look foolish –
Examples :
• RIL factory in Patalganga, Maharashtra – company incurred crores of rupees loss when flash floods hit the area way back in mid 1989 because they were not insured for “flood.” Subsequently they took a policy for “ flood.”.
• Aban Offshore –more recently Aban had not obtained “Loss of Profit” policy for its ‘Pearl” which sank in the Caribbean.

But I am sure that you all will take proper decision whether to insure your gold holdings or not.

God forbid that gold is never stolen from anyone but if it is stolen and Insured then too there is a bigger problem – that’s related to filing a dreaded FIR with our polite and disciplined police force and then chasing the insurance company to make good the loss as per insurance terms which need to be read with a nice magnifying glass!

The point is whether it’s a 737 jet plane, an offshore rig, a house or gold,insurance makes sense – after all you are buying gold as an insurance against gold [ even as you gain notional profits as the price rises ] and if you don’t insure it, then the very purpose of buying gold gets defeated, if something untoward happens.

3. Costs of Re-assay has to be borne by seller –
To assay a metal is to subject it ( such as silver or gold) to chemical analysis, to determine the amount of alloy. The costs involved in re-assay has to be borne by the seller – after all the seller is more interested in selling than buyer is interested in buying, isn’t it? So, owning physical gold has this demerit. Trust you may be aware of this and may be you can check with your family goldsmith for more information on
assaying/re-assaying


4 Million/ Billion dollar questions ?
Ask the jeweller questions. Will he repurchase the gold? Will he pay in cash? Would he discount some gold while calculating the buy-back price? Would he insist on exchanging, and not buying back, the jewellery?

I have deliberately focused more on physical gold as it reflects the higher costs and risks involved in holding physical gold as compared to Gold ETF’s.


B ] PHYSICAL GOLD VS. GETF’s

In India, Gold Exchange Traded Fund is a relatively new concept but since the day Benchmark Mutual Fund launched the first Gold Exchange Traded Fund on 8 March 2007, six more mutual fund houses have launched Gold Exchange Traded Fund, which is a cost effective and convenient method for investing in gold through units of mutual funds. Gold ETF offers many advantages over the conventional method of buying physical gold. Investment objective of Gold Exchange Traded Funds is to generate returns that closely correspond to the returns provided by domestic price of spot gold.

At present, there are seven Gold ETF schemes available in India which are as under:

1.Benchmark Mutual Fund was the first Mutual Fund House to have launched Gold Exchange
Traded Funds (NSE Symbol GOLDBEES) in India.

2.Reliance (NSE Symbol RELGOLD),

3.Kotak (NSE Symbol KOTAKGOLD),

4.UTI (NSE Symbol GOLDSHARE),

5.Quantum (NSE Symbol QGOLDHALF),

6.SBI (NSE Symbol SBIGETS) and

7.Religare (NSE Symbol RELIGAREGO)

Source :http://ezinearticles.com


And, now given below is a brief comparing physical gold with gold ETF’S.

S No	Parameter	Jeweller	Bank	Gold ETF
1	How Gold is held	Physical (Bars / Coins)	Physical (Bars / Coins)	Dematerialized (Electronic Form)
2	Pricing	Differs from one to another. Neither transparent nor standard.	Differs from bank to bank. Not Standard.	Linked to International Gold Prices and very transparent.
3	Buying Premium above gold price	Likely to be more	Likely to be more	Likely to be less
4	Making Charges	Charges are incurred	Charges are incurred	No Charges are incurred
5	Impurity Risk	High	Nil	Nil
6	Storage Requirement	Locker / Safe	Locker / Safe	Demat Account
7	Security of Asset	Investor is responsible	Investor is responsible	Fund House takes the responsibility
8	Resale	Conditional and uneconomical	Banks do not buy back	At Secondary Market Prices
9	Convenience in Buying / Selling	Less convenient, as Gold needs to be moved physically	Less convenient, as Gold needs to be moved physically	More Convenient, as held in electronic form under the demat account
10	Quantity to Buy / Sell	Available in standard denomination	Available in standard denomination	Minimum is ½ or 1 gram according to the fund
11	Bid Ask Spread	Very High	Can’t Sell Back	Very Low
12	Risk of Theft	Yes, possible	Yes, possible	No, Not possible
13	Wealth Tax	Yes	Yes	No
14	Long Term Capital Gains Tax	Only after 3 years	Only after 3 years	After 1 year

Source :http://www.equitybulls.com/mutualfunds/goldetf.asp.


C ] WHICH IS BETTER – PHYSICAL GOLD OR GETF’S

And finally, if any one of you were to ask whether physical gold and Gold ETF’S [ GETF ] will have the same value?

Well, the answer is no because the GETF’s value will depend on the objective of the fund and the inception date and consequently on the NAV of the GETF which will fluctuate on a day to day basis based on the price of gold prevailing in the international market.

Most important, one should go for that GETF which has highest liquidity (read volumes) Gold Bees is usually traded well. Besides, you need to check out the expense ratio. I understand that the expense ratio in most of the GETF’s hovers around 1 per cent except SBI -SE Symbol SBIGETS [ its around 1.6 per cent ]

So, SBI’s GETF should best be avoided.

I guess, GETF’s are a better option than physical gold.

1 Please do not be tempted to take a leveraged position in Gold – physical/ Gold ETF’s can backfire if the price of gold goes downhill.

2. Please do not invest more than 10 per cent in gold [ physical +GETF ]

3. Please consider the opportunity costs involved whilst buying gold i.e. the returns you have to forego by buying gold instead of investing in other avenues which would have given you better returns. [ of course, after factoring the risks involved ] Any way, no risk, no gain and higher the risk, higher the gain.

Going forward, I believe that gold will continue to be a part of every investor's portfolio as an insurance against inflation, geopolitical tensions and turbulence in the global financial markets

Friends, Good luck to you all and may your life and dreams glitter like gold.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd