Light up with gold

Before you go investing, here are some aspects you need to factor in.

Buying gold during Diwali is considered auspicious. But is it only superstition or has the ‘yellow' metal really brought riches for its buyers? Well, investors who bet on gold for capital appreciation have made money, if the trend in the last five years is anything to go by. The price of gold has gone up from Rs 875/gm during Diwali 2006 to around Rs 1,968/gm now, appreciating at about 22 per cent annually on a compounded basis over the last four years.

So what has helped the yellow metal to put in such a performance? The precious metal benefited immensely from the rising investment demand led by ETFs and Central Bank buying, to the economic downturn in the US and the greenback's value depreciation seen in the last few years.

The scene back home too hasn't been any different. Predominantly a gold jewellery market for years, India too has seen increase in gold-related investment demand.

Benchmark Mutual Fund's gold ETF- GoldBeES, the largest gold-based exchange traded fund in India, has bought 4.6 tonnes (4,600 kg) of gold over the last two years and holds 6.6 tonnes currently.

Read on to find out how you can add some bling to your investments.

ETF route

Introduced in 2007, the ETF route to investment in gold is pretty new to India. Presently, there are eight mutual funds that have gold ETF products listed.

Interested investors can buy units of the fund during the NFO period or even through the stock market, as units of gold ETFs are listed in stock exchanges. Each unit of a gold-ETF represents a certain grammage of gold. India-listed gold ETFs generally track the London Bullion Market (in US dollars) and represent standard gold of 99.5 per cent purity.

Being market listed, the gold ETFs, however, behave in tandem with the demand-supply forces in the market, delivering somewhat higher or lower return than the spot gold. GoldBeES has delivered a return of 21 per cent over the last one year while the spot price of gold (in rupee terms) has appreciated 23 per cent.

One thing to watch out for before buying into gold ETFs is the specific ETF's average daily volumes. Know that scarce volumes increase the cost of transaction. Currently, the Benchmark MF's GoldBeES has the highest daily volumes. GoldBeES have seen an average volume of 70,000 units every day over the last one month.

Other options

Buying gold from banks is also an option. Banks sell gold as coins and bars of different grammage. Purity and guaranteed caratage is the advantage with buying gold from a bank. But buyers should bear in mind is that banks may charge a stiff premium over the prevailing gold price. The pain point is banks do not buy these coins back if customers intend to sell them. You will then have to go to a local jeweller to sell them. But if you are looking to buy some gold coins , look up our ‘Check It Out' column, that showcases gold coin offers from many banks.

There's also an option of buying gold jewellery. However, it isn't the great way to go about it, unless you are buying it for ornamental value. The wastage charges on old jewellery typically tend to eat into a significant share of your returns.

The other way to buy gold is through the futures contract in the commodity market. Both MCX and NCDEX offer future contracts in gold. Contract sizes vary from 8 gm, 100 gm to 1 kg. If you want to trade in gold, you pay only a margin of 4 per cent of the contract value and buy it. You would, however, have to square your position before expiry or roll it over, if you wish to hold. And, in case you wish to take a delivery, you would be required to pay the full contract value five days before the expiry of the contract, says Jajati Barik, Manager-Commodities, Motilal Oswal Commodities. All deliveries of MCX, however, happen only in Ahmedabad. Among other charges that add up the delivery cost are brokerages, service tax on brokerage and VAT and C&F charges. For an 8 gm Gold Guinea contract, whose current contract value is around Rs 15,500, delivery charges in total would be around Rs 350 (2.2 per cent).

The dollar effect

Gold, be it any form, tracks the international gold rate denominated in US dollars. Returns for Indian investors will depend on rupee's value against the dollar in that period. A falling rupee will enhance gold returns while an appreciating rupee will erode returns. For example, since last Diwali, gold has appreciated 27 per cent in dollar terms. But in rupee terms, the return is only 23 per cent, as the Indian currency has appreciated from Rs 46.3/dollar last year to Rs 44.56/dollar now.

Source: http://www.thehindubusinessline.com/iw/2010/10/31/stories/2010103151021600.htm