Ways to Invest in Gold
Introduction
Rahul is a worried father these days. His daughter’s marriage is planned 6 months down the line. He had big plans to buy a lot of gold for his daughter like any father would do in a normal Big Fat Indian Wedding. But the way gold prices have soared in the last 1 year from levels of Rs 10,000 per 10 grams to the current Rs 17,000+ per 10 grams, Rahul is in a fix. Even after such a big rise in prices in such a short span of time, gold prices show no signs of stopping. Rahul is wondering whether he would be able to buy the quantity of gold he had originally planned to buy. If we sit back and analyse the reasons behind the tear away rally in gold prices we will have to move back in time by 2 years.

In the midst of 2007 the subprime crisis started unfolding in the US. At the beginning of 2008 the global economy started going through a liquidity crisis. The major stock indices in the US, Japan, Europe and the Asian markets were going through a financial turmoil. The US and the global economy were going through a worst recession since the great depression of 1929. All major asset classes like equities, real estate, commodities etc plunged. There was a complete crisis of confidence in all asset classes except for one. Yes you guessed it right: GOLD.

The US Government and the other Governments across the globe had to announce huge stimulus packages to bailout their economies from plunging further into a deeper recession. The huge stimulus announced by the US Government added to the already burgeoning deficit of the US. The weak economy along with the huge fiscal deficit led to the fall in the US Dollar against major currencies like the Euro and the Japanese Yen. Since commodities are priced in US Dollars, the fall in the dollar leads to rise in the prices of gold and other commodities. The US Dollar and prices of commodities have an inverse relationship. Some of the reasons for the recent rally in gold prices are:

1. Depreciation of the US dollar against the other major global currencies.
2. Inflation: Fear of rise in inflation in the US and other major economies across the globe, due to excess liquidity in the financial system; courtesy the huge stimulus packages injected by central governments. Gold is considered as a safe haven during times of uncertainty.
3. Diversification by Central Banks from US Treasuries to gold due to loss of confidence in the US Dollar. Recently the RBI bought gold worth more than $ 6 Billion from the IMF.
4. Increasing gold consumption demand from end users from BRICs (Brazil, Russia, India and China) economies and other emerging economies. Supply has not been able to keep pace with demand in the recent times.
5. Commodity Funds: Lot of Fund Houses have launched commodities funds or gold specific funds. Buying by these funds has added to the increase in demand for gold.
6. Carry Trade: The dollar carry trade has also contributed to the rise in gold prices. Interest rates in the US are near zero. People are borrowing at rock bottom rates and investing this money into other asset classes like equities, real estate, commodities (gold and other commodities).
7. Geo-Political Tensions and Oil Prices: The rising tensions between Israel, US and Middle East Countries (which control major oil supplies) have led to a spike in Crude Oil prices. Rise in oil prices pulls up gold prices along with it. Crude oil prices and gold prices have a direct relationship.
8. Excessive Speculation: Speculators like traders and hedge funds taking big one side bets on the price movement of the commodity also contribute to driving the price of gold.

Due to all the above reasons in the past couple of months, gold prices have spiked in the international market from below USD 1000 per ounce to near about USD 1150 per ounce. With most major global economies yet to come back on sustainable recovery mode, gold prices are expected to mover further up from here due to the uncertainty surrounding sustainable economic growth. Due to this today gold has become a preferred investment asset class in everyone’s portfolio. People invest in gold for various reasons like investment asset class, accumulating gold for daughter’s wedding, hedge against inflation, diversification etc. Portfolio managers recommend 10-20% portfolio allocation to gold. So this brings us to the question of what are the different ways in which one can invest in gold. Let’s look at some of the ways of investing in gold in detail:

1. Gold Exchange Traded Funds: Gold ETF’s are like mutual funds. Gold ETF’s buy and sell units just like mutual fund units. Every purchase of units by an investor is backed up by equivalent purchase of physical gold by the fund.
   For example an investor wants to invest Rs 10,000 in gold ETF. The ETF will buy equivalent amount of physical gold and issue the investor units as per the ruling price of gold on the day of purchase. The units are issued in demat form. This saves the investor from the hassle of taking physical delivery and worrying about how to store it in a safe place. By holding the units, the investor can benefit from the rise in the price of gold. The investor can later sell the units very easily just like selling shares and book profits, if any. Investors need to have a demat account and a share trading account with a broker to buy and sell gold ETF units. So dealing in gold through ETFs comes with advantages like convenience, assured purity of gold, no worrying about secure storage, insurance etc.
   SPDR Gold ETF is the world’s largest gold ETF. Another example of gold ETF is iShares Comex Gold Trust. Examples of Indian gold ETFs are Quantum Gold ETF, Kotak Gold ETF, Reliance Gold ETF, UTI Gold ETF etc. These ETFs are listed on the stock exchanges and can be bought and sold through broking firms just like shares.

1. Gold Bars and Coins: Investors can also invest in gold by buying gold coins and bars. These gold bars and coins can be bought from banks, jewellers, financial services companies or even some post offices. Gold coins are available in the weights of 5 grams, 8 grams, 10 grams, 20 grams, 50 grams etc. Investors can also buy gold bars of higher weights.

1. Gold Futures: Investors can take exposure to gold through the derivatives market. Investors can buy gold futures contracts through which they can buy a fixed quantity of gold at the fixed price on a certain future date. In India gold futures are traded on the MCX, NCDEX and NCME commodity exchanges. On the MCX gold can be traded through various contracts like Gold Guinea (trading unit – 8 grams), Gold Mini (trading unit – 100 grams), Gold HNI (trading unit – 1 kg).
   However investors need to be aware of all the risks before investing in futures. Caution needs to be exercised before putting hands in the futures market as a negligent investor may end up burning his fingers in the futures market.

1. Gold Shares: Owning shares of gold mining and exploration companies is also one way of taking exposure to gold. When prices of gold move up in the spot market and the futures markets, shares of gold mining companies also move up in tandem with them. So investors can benefit from the rise in gold prices by having shares of gold mining companies. Investors can also take exposure to shares of gold mining companies through mutual funds which invest in shares of gold mining companies.
   Barrick Gold Corporation is one of the largest gold mining companies in the world. There is not much choice for buying shares of gold mining companies in India as there is hardly any listed company dealing in this.

1. Jewellery: This is the most popular way of owning gold in India. Indians are very much obsessed with wearing gold ornaments and due to this reason India is the largest importer of gold in the world. Lot of people buy gold jewellery during weddings and auspicious days like ‘Akshay Tritya’, ‘Dusshera’ and ‘Diwali’. But buying gold in the form of jewellery has its own disadvantages like storage costs, risk of theft, insurance and loss of value at the time of selling.

Conclusion
We have seen that gold can be bought in various ways like gold ETFs, bars and coins, futures, gold shares, jewellery etc. Even today maximum people in India buy gold the traditional way in the form of jewellery. Gold ETFs and Gold Futures are a recent phenomenon although they are fast catching up as the awareness of these products increases among the masses.

If a person wants to accumulate gold over a period of time for his daughter’s wedding or son’s wedding, he can start investing a fixed amount on a monthly basis in gold ETF. He can keep accumulating ETF units regularly from the time the daughter is young. His purchase costs will get averaged out over a period of time and also since he will be holding gold in electronic format he will be saved from the hassle of worrying about keep gold at a safe place. Through gold ETFs a person can accumulate as little as half a gram or one gram of gold every month. And finally when the marriage event happens just before that he can sell all the gold ETF units at one go and buy physical gold or jewellery in bulk from the market. So in this way a little bit of smart planning can save the father from the last minute rush for buying gold for the child’s marriage at exorbitant prices which can burn a big hole in his pocket.

To conclude, whatever be the reason for buying gold and in whatever form, it should form a 10-20% of a person’s investment portfolio be it in the form of jewellery, bars, coins, ETFs etc after all we Indians love our gold; don’t we? So Happy Gold Investing.

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