Plan to attain your purpose, doing work without planning will lead to failure. Sir Benjamin Franklin quoted “By failing to prepare, you are actually preparing to fail”. Often said by Yogi “If you don’t know where you are going, you will end up some place else”. Sir Ralph Waldo Emerson quoted, “The desire for Gold is not for Gold, it is for the means of freedom and benefit”. I am fully convenience with Sir Ralph about investing and accumulating gold, the freedom of liquidation and inflation, and benefits of appreciation and returns on investment in gold.
In our previous post we saw there are basically four avenues of investments other than deposits in banks and debentures. They are
1) Investment in Gold (Physical Gold, Ornaments and ETF’s)
2) Investment in Real Estate and Properties.
3) Investment in Endowment Plans of Insurance Companies and Mutual Funds.
4) Investment in Stock Market (Capital Market)
In this article / post we will see investment in Gold in a bit detail.
When we invest in Gold; we usually buy Gold Ornaments or Pure Gold Bars / Gold Coins from our known jewellers in the Jewellery Market (Bullion Market). Usually these jewellers charge us some making charges which we have to pay in addition to the value of Gold. This making charge varies from jewellers to jewellers and it varies from 5% to even 15%. Making charges of Gold ornaments is more than making charges of Gold bars and Coins; but still Gold bars and coins carry making charges. Whenever after sometime when we want to sell these physical gold ornaments and bars to any jeweller, he doesn’t pays us the making charges of these ornaments or bars instead he calculate the value of bars or ornaments with the value of Gold. The amount paid by us for the ornament making is totally wasted and we suffer this loss in our investment which yields no value to us.
There is also always a question on the purity of these gold ornaments bought by us from jewellers. We come to know about the purity of these gold ornaments and bars only when we plan to liquidate our investment from them.
The third and the most important disadvantage which we can suffer is when we invest in gold ornaments and bar is liquidity. If the jeweler is in cash crunch or if there is less demand of physical gold in the jewellers market they buy our gold back at a lesser price ranging to a demurrage of 2% to 5% due to faint demand in the market. They say “Our buying rate is different and our selling rate is different” and the spread difference usually differs by 5%. Recently investors in gold market has suffered a severe problem which I am about to unfold. The gold price has rise due to uncertainty in market because of Global Pandemic COVID-19. We say a sudden rise in gold price and gold almost appreciated 20%-25%. But due to pandemic the shop of gold jewellers remained closed for some time and investors in gold were not able to liquidate their investment. When the shops reopened the gold price corrected down and there was no demand of gold even in the jewellery market. People are financially drained due to Global Pandemic and marriage and social gatherings were reduced as compared to early days hence affecting the demand of gold in the jewellery market.
Currently the best substitute for investment in Gold is Gold ETF’s. Advantage of Gold ETF over Gold Ornament is we are not at all worried about the purity of Gold, as the Gold ETF’s are nothing but matching of 24 carat Gold backed securities. Let us see these Gold ETF’s in more detail. Gold ETF’s are Electronic Traded Funds of Gold. These ETF’s are nothing but a kind of instruments similar to mutual funds which are traded on stock exchange backed by pure 24 carat physical Gold. These ETF’s are only issued when the equivalent physical gold by weight and value are kept in the vault of Treasury and under the custody of Trustee of the Gold ETF’s. The Gold ETF’s are promoted by various companies and they are known as promoters of these Funds. These are the fractional ownerships of gold even to as small as 10 milligram. If a person invest in ETF of Gold trading on the exchange say @ 5000/- this simply means gold equivalent of 5000/- is reserved in the vault in the custody of the trustee by the fund promoter for investor protection. Whenever the investor wants to liquidate its holding he can directly sell its ETF’s on Exchange similar to Equity or Shares.
Elaborating further, in India people save money and some also save their hard earned money with their known jewellers as we already know that investment in gold in India is practiced by every family in our previous articles/posts. Disposing further, these jewelers run various schemes and saving plans for their customers similar to Recurring Deposits and Pigmy Collections run by Banks. The amount by investors is kept with the jewellers and after a period of say 12, 24 or 36 months, the amount saved or deposited by customers to the jewellers get matured and they are allowed to buy gold ornaments equivalent to their deposits from the jewellers. Some jewellers also pay negligible returns to their customers, but in general the benefits of this deposit are enjoyed by the jewellers. The chance of rise in gold price or the appreciation in gold price is of no use to the customers. Some gold jewellers also run draws or schemes in which they entertain 500 or 1000 customers and the scheme is run for say 12, 24 or 36 months and they attract customers saying they will open lucky draw each month and the customer entitled for the draw be rewarded with the amount of maturity if his name is drawn in the lucky draw contest. The Ministry of Finance has directed to the Reserve Bank of India for intervention and has directed to warn jewellers for running such Draws, Contests and Ponzi Schemes. Every jeweller running such schemes has to inform RBI and have to take permission before running such scheme. Many investors are cheated with these schemes.
The second disadvantage of investing in such scheme is the customer has to buy gold ornaments from these jewellers which is compulsory and they charge making charges on these ornaments which the customer has to bare.
The third disadvantage of investing in such schemes remains the same of the legitimacy of gold purity delivered to them.
Summing up all, the advantages and disadvantage of investment in Gold ornaments/bars and Gold ETF’s are;
1) The only advantage of investing in Gold Ornaments/Bars is you enjoy the use or utilization of physical holding of gold ornaments/bars where as Gold ETF’s are held in our DEMAT account. But looking at this advantage the disadvantage of theft, lost or stolen cannot be avoided when it comes to physical holding of Gold ornaments or bars.
2) Physical Gold suffers liquidity crunch which is not in the case of Gold ETF’s. The Gold ETF’s are bought and sold in the Exchange on a single click and one can get his money back in his trading account in a minute or bank account in few minutes.
3) The spread difference in buying and selling of physical Gold ornaments/bars is more as compared to the spread difference of Gold ETF’s. No such hidden or unfair activity is practiced in the Exchange. The deal is transparent with fair demand supply spread difference.
4) No making charges are charged in Gold ETF’s as compared to Gold ornaments/bars issued from the jewellers, so the drainage of making charge can be saved.
5) No question arises for the purity of Gold in ETF’s as compared to Gold ornaments/bars issued from the jewellers.
6) One can even invest or buy ETF of 10 milligram of Gold which costs as of today at 50-55 INR which is not possible with the investment in physical gold.
In the next article/post we will see investment in real estate or properties. If you like the posts please share the post to the needed one to help them prosper with knowledge and wisdom.