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Investing in Gold Everything You Should Know
Investing in Gold Everything You Should Know
Investing in Gold Everything You Should Know
By Raag Vamdatt
www.RaagVamdatt.com
Note: Although the data presented in this eBook is primarily from the Indian
market, most of the analysis and the guiding principles would be relevant for
investors from markets across the globe.
To give your feedback about this eBook, please click the link below to fill out a
survey that takes less than 2 minutes to complete:
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All facts and figures in the eBook have been derived from publicly available sources.
Readers are advised to verify these, and consult their financial planner / financial advisor
before making investment decisions.
Table of Contents
About the Author: Raag Vamdatt...............................................................4
About www.RaagVamdatt.com.................................................................5
Some User Comments...........................................................................................................5
By www.RaagVamdatt.com
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About www.RaagVamdatt.com
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(http://www.raagvamdatt.com/Life-after-life-Why-you-should-buy-LifeInsurance/97/ )
"Settle" early in life - buy a home when young
(http://www.raagvamdatt.com/Settle-early-in-life-buy-a-home-whenyoung/96/ )
Interpreting Price to Earnings (PE) Ratio
(http://www.raagvamdatt.com/Interpreting-Price-to-Earnings-PE-Ratio/95/ )
Want to own a company? Buy stock!
(http://www.raagvamdatt.com/Want-to-own-a-company-Buy-stocks/113/ )
Systematic Investment Plan (SIP) - A rupee a day, keeps worries away
(http://www.raagvamdatt.com/Systematic-Investment-Plan-SIP-A-rupee-aday-keeps-worries-away/108/ )
Start saving early and gain from Compounding - Early bird gets the worm
(http://www.raagvamdatt.com/Start-saving-early-and-gain-fromCompounding-Early-bird-gets-the-worm/105/ )
Saving enough is not enough Effect of Inflation on Savings
(http://www.raagvamdatt.com/Saving-enough-is-not-enough-Effect-ofInflation-on-Savings/104/ )
Saving Income Tax Understanding Section 80C Deductions
(http://www.raagvamdatt.com/Saving-Income-Tax-Understanding-Section80C-Deductions/123/ )
Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage
(http://www.raagvamdatt.com/Income-Tax-IT-Benefits-of-a-Home-LoanHousing-Loan-Mortgage/121/ )
Real Estate Investment
(http://www.raagvamdatt.com/Real-Estate-Investment/119/ )
When you aren't around - Succession Planning - Will and Nomination
(http://www.raagvamdatt.com/When-you-are-not-around-SuccessionPlanning-Will-and-Nomination/114/ )
Non-Resident External (NRE) & Non-Resident Ordinary (NRO) Accounts for
NRIs
(http://www.raagvamdatt.com/Non-Resident-External-NRE-and-NonResident-Ordinary-NRO-Accounts-for-NRIs/124/ )
An Introduction to Car Loan / Auto Loan / Vehicle Finance
(http://www.raagvamdatt.com/An-Introduction-to-Car-Loan-Auto-LoanVehicle-Finance/127/)
www.RaagVamdatt.com - Financial Planning Demystified
Page 7 of 21
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Indians are known to be gold buyers. India is world's largest gold market Indians buy more gold than people from any other country. Here are some
interesting and eye-opening facts:
Indians bought 774 tons of gold in
the year 2007, up 6% from 2006
Page 8 of 21
By www.RaagVamdatt.com
gold
by
a
margin
long
During
period
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1983 to 2005, gold gave a return of 7.8% per year compared to an inflation of
7.6%.
Although this is not spectacular, it is definitely inflation beating.
The above figure shows movement of gold price with respect to inflation (as
measured by Consumer Price Index CPI). In the period depicted (19702005), gold price has outpaced inflation. But please note that this is an
exception and not a rule generally speaking, gold beats inflation by a small
margin over the long term.
Remember - Gold has maintained its purchasing power over several
millenniums!
Gold investment acts as an insurance policy against inflation and economic
slowdowns. Considering the benefits offered by gold investment, it is
comforting to know that at least you are not paying for this insurance!
If you have gold investments, you would lower your overall returns during the
times of economic booms, but at the same time, you would preserve your
returns in times of economic slowdowns - that's the trade-off we have to
make!
Thus, we can safely conclude that gold should be a part of everyone's
portfolio.
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2006
India accounted for a little over 20% of the global demand
for gold in 2007, worth $17.8 Billion
We also saw in Chapter 1 that owning gold is very important, and desirable,
for all investors.
But the golden question is - how should one invest in gold?
(Remember, there is a difference between buying gold for ornamental
value, and buying gold as an investment. Here, we are discussing about
buying gold as an investment)
The third bullet above says it all: Most of the "investment" in gold in India is in
the form of jewellery.
But that is not the best way to invest in gold.
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Let's say that the making charge is Rs. 100 per gram. With the price of gold
being Rs. 1200 per gram, it is a whopping 8.3%! This is like paying an 8.3% entry
load for a mutual fund it means that if you want to invest Rs. 100, your
actual investment would end up being only Rs. 91.7. Now that's ridiculous!
Liquidation Charges
To realize profit on any investment, you have to sell what you bought. Let's
consider the time when you want to liquidate your gold holding by selling it.
If it is in the form of jewellery, you would have to forego another fraction of
the value in the form of "melting charges" or "melting losses". And this is
around 5% of the value. How does a 5% exit load for a mutual fund sound?
Purity
The gold used in jewellery is either 22 Carats or lower. This means that a part
of the weight of the jewellery is not gold.
You want to invest in gold, and not a mixture of metals, right? Then, why buy
something that is not pure gold?
Authenticity
When bought as jewellery, gold is bought from regular jewelers. This means
that you rely purely on the expertise (and honesty!) of the jeweler as far as
the quality of gold is concerned.
Unless Hallmark gold is used, there is no certification backing the purity of the
gold. And this means that you can get a rude shock when you want to
liquidate your gold jewellery.
Storage and Safekeeping
Once you but the jewellery, you have to worry about its storage and its
continued safekeeping. This means that you either keep it at home (and
remain worried all the time), or rent a safe deposit locker, and pay yearly
maintenance fee for it. And the jewellery wont be 100% safe even in a
locker!
Summary
So, how does investment in gold sound? 10% making charges, 5% melting
charges and doubtful quality!
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Would you ever invest in a mutual fund (MF) which charges 10% entry load,
5% exit load, and whose quality of investments is doubtful? Of course not
because it is simply unwise!!
The same way, investing in gold in the form of jewellery is not wise. In fact, it is
the worst way to invest in gold due to the reasons discussed earlier.
So, how should one invest in gold? Let's move on to the next chapter.
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Gold Coins
Gold Bars
Gold Exchange Traded Fund (ETF)
Each of these is better than buying jewellery. Of course, each method has its
own pros and cons. Let's discuss each in detail.
Banks also give a certificate of purity with the gold that they
sell.
Disadvantages
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The price that banks charge for gold is usually 10-15% higher
than the market rate. That's way too high! This increase in the cost of
acquisition means reduced profit when you sell it!
Banks do not repurchase gold from you. So, when you want
to sell, you would have to go to the market, and you would only get the
prevailing market rate.
Conclusion: Buy gold from banks only if you are extremely risk averse you
pay too high a price for getting certified gold.
Jewelers usually buy back gold coins or bars that they have
sold in the past - again at the prevailing market price
Disadvantage
There is no guarantee about the quality of gold. The quality
totally depends on the reputation of the seller.
Conclusion: Although buying gold from jewelers is better than buying gold
from banks, you need to be really careful while doing this. Before finalizing
the jeweler to buy gold from, do some research and find out the firms
reputation. And buy only from a jeweler who is known for selling quality gold.
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The advantages of Gold ETFs are manifold, and therefore, Golf ETFs warrant a
chapter of their own!
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Conclusion
There was a time when shares were issued and traded in physical form. You
held share "certificates", and had to "deliver" these certificates to the buyer
when you sold your shares. Then, dematerialization came, and all the hassle
with holding physical shares was gone.
Now, it is time to embrace dematerialized gold in the form of Gold ETFs, and
enjoy the benefits of dematerialization all over again!
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Gold ETFs are very new in India the first Gold ETF started trading only in
February 2007. Therefore, long term historic data is not available.
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Now that we know how to invest in gold, the obvious question is How
much?. What percentage of your portfolio should be invested in gold?
Well, as a rule of thumb, you should invest around 5% of the portfolio in gold.
This investment in gold would act as a solid pillar or core for your portfolio,
giving it the strength to withstand economic fluctuations with minimal
impact.
Of course, this is only a rule of thumb. The actual investment in gold would
depend on your tolerance for variation in your portfolio value the more you
invest in gold, the more hedge you would get against inflation and
downturns.
But at the same time, if the economy is performing well, the returns from gold
would be below average, and would drag down your overall portfolio
returns.
Therefore, carefully assess your risk tolerance, and decide what percentage
of your portfolio you would invest in gold.
Happy investing!
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By www.RaagVamdatt.com
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