Gold Exchange-Traded Fund (ETF)

A Study on Physical Gold and Gold ETF

Stock Market has lead to tendency of many to go in for much safer investments that gives a reasonable return. This is the reason for gold gaining popularity as one of the safest avenues for investment.

Gold has always held importance as a good investment proposition since the days of our ancestors. But the recent trends of daylight robbery, murders and greed for the precious yellow metal with the difficulty of storage and safety of physical gold had made gold a cumbersome proposition. In addition, fraudulent and not uniform practices followed by jewelers and difficulty in establishing the purity of gold contributed to the popularity and desirability of gold ETF’s.

Gold ETF’s or gold exchange-traded funds are instruments investing in gold of 99.5% purity. Investing and maintaining these funds just required demat account and a trading account with a registered stockbroker. Gold ETF’s are more ideal than physical gold due the following reasons: 

¨     Gold ETF’s are investments in gold of 99.5% purity only. It prevents one from falling into the clutches of some jewelers that fool customers with smooth and artistic talk. This avoids chances of misplacement of trust, as only a goldsmith could find out the exact purity.

¨     Owning something virtual like gold ETF’s does away with the difficulty of storage and security experienced in possessing physical gold. The units of gold ETF’s can easily be stored in both demat and trading account without being known to the greedy, cheaters, robbers and looters. A word of caution here, you could be sure of it all when you keep your units in accounts with privacy of user name and password.

¨     Gold ETF’s are most ideal for small investors as they can be purchased in small denominations sometimes of even 1 gram or ½ a gram. So ETF’s can be bought easily in small installments regularly and increased in the virtual form. This advantage is not available when investing in physical gold.

¨     Low cost, with affordability in dealing with gold ETF’s contributes to their desirability over physical gold. These instruments are listed in exchanges; the exchange traded mechanism helping to reduce processing charges, disbursements and collection charges. Gold ETF’s also help do away with the carry charges in gold futures.

¨     The ease to convert gold ETF’s into liquid cash easily at real time prices on the stock exchange avoiding charges like commission, and unnecessary fuss over quality and price by jewelers make them a desirable investment. This makes buying and selling these units easy.  

¨     Right and uniform pricing in Gold ETF’s offered no scope for price discrimination that is experienced in encasing physical gold at the jewelers. One lacking knowledge and experience in dealing in gold would do best to invest in good gold ETF’s.

¨     Gold ETF’s offer protection from the liability of taxes. The taxation system for gold ETF’s is similar to non-equity mutual funds. One only needs to pay the lower of the two, long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation on profits made.

¨     Gold GTF’s are likely to show lesser tracking errors as compared to normal funds as the creation and redemption of units are done with units of the same type. This accounts for lesser liquid cash being required and the short time interval between buying and selling of units.

However some may disagree with me and say that the psychological satisfaction of seeing and feeling physical gold in the physical form is important and gold ETF’s are a fictitious concept. It is purely a question of ones own perception, but I would strongly contest gold ETFs if investment, safety and security is ones objective.

If you keep gold in the form of ETF, you will not have any emotional attachment towards that. You will really consider it as an investment. If you need money for buying a property or kid’s higher education you will feel free to encash it. But in the case of physical gold, we will not be prepared to sell it because we will have emotional attachment towards physical gold.

So, Gold ETFs are the better way to invest in gold.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.