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Commentary

Old Is Gold But ETFs Are Better Gold

From Prerna Katiyar, in an ET Article:

Unfortunately, most of us think quite like Mr Gupta. That is, if we had purchased gold at, say, Rs 10,000 (per 10 gm) and if today it has touched Rs 13,500, it’s a clear cut 35% gain, no matter from where we bought it and what is the purity level, only to be wronged when we actually go to sell the yellow metal in the market. Gold is trading at an all-time high of $1,000-plus an ounce in the international market and has touched the 13,500-mark in the domestic market. This is encouraging people to liquidate their possessions, just like Mr Gupta. Few jewellers even claim that in the past few months, they have seen more people coming to sell gold rather than buying it.

There are some misconceptions as to buying gold. The common one being that a person wouldn’t be duped by ‘his own’ jeweller just because he has been buying gold from the shop for a long time. Take the case of Ms Anamika Singh who had purchased a gold chain (billed for 22 carat) from their ‘old common’ jeweller in her vicinity. Recently when she got the gold chain’s purity checked by a caratage machine, it was just 18 carat — a loss of 18%, it’s like paying Rs 100 for Rs 82.

According to a Bureau of Indian Standards (BIS) 2006 survey, 90% of non-Hallmarked jewellery failed the purity test. In few instances, the shortage of purity was as high as 45%.

Speak to most of the non-Hallmarked jewellers, and we find that it’s common to deduct anywhere between 10% to as high as 25% from the total market value.

Buying gold at a jeweller (in the form of jewellery) is horrendously irrational. Because:

  • They’ll sell you lower purity than they say.
  • They’ll charge you “making charges”, a substantial sum, plus “wastage”, which is overinflated.
  • When you want to sell, they’ll buy back only at the lower purity level, and then charge you a further 20% discount.

Buying raw gold must be useful then?

  • If you buy from a jeweller without the BIS mark, you may get impure gold.
  • If you buy BIS marked gold, the jeweller may charge you high costs for buying it back.
  • If you buy from a bank, the bank will NOT buy it back. You then have to go to a jeweller who will charge you big money.
  • And if you buy it, you have to store it somewhere and you have the risk of robbery. Security then costs you some maintenance charge.

This increasingly leads me to believe that buying Gold ETFs is a better thing to do. You can buy and sell very close to the current market price.

How to buy? In your online brokerage site, you can choose the symbol GoldBEES in NSE (there are Kotak, Quantum and Reliance Gold ETFs too) and buy. (You can also tell your broker if you have an offline account) Prices are linked to 1 or 1/2 gram of gold, in rupees.

The underlying gold is stored carefully by the ETF issuer and they take care of security etc. You don’t have to worry about purity, the issuer guarantees it. And if you need to have physical gold, just sell the units and buy gold in the market. The difference is not likely to be much.

  • hari says:

    >Hi Deepak,

    Buying GOLD ETF is a good idea. But I came to know that it has a long term capital gains tax of 11.3%. Doun’t you think that this could erode our gains. I feel that for safety a debt fund is good enough. If there is a long time horizon maybe an ETF like NIFTY BEES will also do well.

    Regards
    Hari

  • Anonymous says:

    >Deepak are all gold ETFs one and the same? or does performance vary, tracking error etc.?

    Is there such thing as a “best performer” gold FTF?

    mark

  • Anonymous says:

    >Deepak…What is the upside in gold from here on ? I saw a gold analyst – Jim Sinclair giving a prediction (this he said, when gold was $425) that it will touch $1650 before Jan 11.. I did not listen to him..otherwise, why will I be typing this note and looking for 10% over FD returns…
    SD

  • Deepak Shenoy says:

    >hari: Yes I think it does have long term gains tax. Tax shouldn’t be a big consideration – equity gains are likely to be substantially lesser, in the 2-3 year term, than gold gains. (In my opinion)

    Mark: Haven’t checked tracking errors – if anyone has, do let me know. The data should be interesting.

    SD: Gold according to me has a strong thing going for it, but I have no fixed target price yet. I am looking at 50-60% returns in about two years.

    Upside wise I had an earlier post on why I am bullish on gold.

  • Anonymous says:

    >In my opinion there are certain disadvantages related to Gold ETF:

    1. LTCG as pointed out by Hari

    2. Gold ETFs charge an expense of 1% of assets. The expense may come out to be more than the return you earn during an year ( what has happened during the last 20 years, ignoring the current run-up )

    In my opinion the best way to build an asset in gold is buying it from a branded jeweller like Tanishq which has:
    1. Uniform rates across the country
    2. Is ready to buy-back at the prevailing prices anyday in future.
    3. and of course, purity is guaranteed.

    After you have invested 20-30K in gold the expense of holding a locker ( excluding the FD, that is required to be maintained ) in some of the nationalised banks will turn out to be lower ( you can still lower it by paying the locker rent in advance ) than the Gold ETFs expenses.

    And yes, the locker expense does not increase with an increase in gold prices 🙂

    Of course, Wealth-tax has to be paid on physical gold.

  • Deepak Shenoy says:

    >anon: LTCG applies to physical gold also (I didn’t know wealth tax applied to gold, i thought wealth tax was abolished)

    While Gold ETFs provide for 1% of assets, I doubt that has been teh case in the last twenty years (gold has grown above inflation for nearly all years in the last twenty, but only recently has it run up higher) 1% is not a big deal, if you consider the storage and security costs yourself (you still need to physically get the gold and take it to a jeweller etc, which is tricky if it’s worth over 10 lakhs) And of course there’s the hassle of actually doing so – an ETF is far better, a couple clicks and you are done.

    I don’t know if Tanishq buys back at the same rate – I think they have a pretty hefty spread. Do check that out – I don’t buy physical gold because I have no use for storing it, so I would probably never know.

  • Anonymous says:

    > (gold has grown above inflation for nearly all years in the last twenty, but only recently has it run up higher)

    Could you please substantiate this with numbers? Please see:
    http://goldinfo.net/londongold.html
    and http://incometaxindia.gov.in/ItInformation/CostInflation.asp

    Consider the period from March 1982 to March 2005, since we have the inflation numbers available for this period.

    I’m not considering the Gold prices in India ( available here http://sify.com/finance/forex/fullstory.php?id=11959556 ) since the import of gold was banned uptil 1992, and there was a huge disconnect in the domestic and international prices.

    (you still need to physically get the gold and take it to a jeweller etc, which is tricky if it’s worth over 10 lakhs)

    agreed.

    an ETF is far better, a couple clicks and you are done.

    This is a huge ++++++ve.

    So here we stand
    Gold ETFs:
    1. 1% expense
    2. LTCG
    3. Covenience!!

    Physical Gold:
    1. Wealth Tax ( one house + wealth upto 15L exempt )
    2. LTCG
    3. Hassle

    For the next 2-3 years, Gold ETFs are best , but I’m still sceptical about investing in it for a longer period.

  • Deepak Shenoy says:

    >Anon: Gold prices can be seen here – in Kaushik’s blog. I’m not sure why the Indian “official” Gold prices should have been hugely different, if you were in India, you would see only the rupee impact (not the international price impact)

    In fact if you look at post 1992, you will see that the rupee depreciation effect got gold a much better return than inflation – rupee fell from around 17 in 1990 to 43 in 2000. Since 2000, the rupee has remained volatile but gold went up 10-20% a year. Inflation, indexed since 1990 is up only 2.5x (to now) but gold is up nearly 4x since then. (till 2007, it was up about 3.3 x). It has been a good inflation hedge till now (I don’t know if it will continue to be, just know that past data has been so)

    I don’t think history is a base to predict because the supply and information issues don’t apply any longer.

    Your point is taken though – there is an advantage to buying physical gold at places like Tanishq, and if you are ok with keeping a safe etc. then that may be an alternative to an ETF.

    To me Gold is only a short term thing – about two years. I think we will have a subdued return once this crisis has died down.

  • Prashant says:

    >hi Deepak
    Is there any entry/exit load on etf (I think that after NFO period there is no load but m not sure about it)? And I think that different AMCs are trading at different rates. Why is this difference in price if they r
    based on gold price only

    Prashant

  • Deepak Shenoy says:

    >prashant: entry load on etf’s is zero (you do pay brokerage though)

    Gold prices on ETFs can vary basedon
    a) cash holding
    b) expenses
    c) how many grams of gold each unit is worth

    FOr instance quantum does 1/2 a gram versus benchmark whcih does a gram per unit.