INDIANS love for gold is legendary. According to research data, Indian households have amassed over 16,000 tonnes of gold in the form of jewelry. The value of this as per market price is Rs 27.2 lakh crores (USD591 billion). That is close to twice the foreign exchange reserves held by the RBI.

Forms of buying gold
1. Jewelry
Jewelry is the most traditional and the dominant form of buying gold in India. However, they do not buy it for investing reasons. The reason: there are heavy losses in the form of wastage and making charges. This can vary from a minimum of 10 per cent to as high as 35 per cent for special and complex designs.

2. Bank coins
It’s not an investment idea as the premium that banks charge for their coins is anywhere between 5 and 10 per cent. The bank coins have lesser liquidity as they are not bought back by the banks.

3. World Gold Council coins
These are coins issued by jewelers who are part of the WGC network. They have lesser premium over the market price (1 to 2 per cent) and are redeemed at the market price when one takes them for selling off.

4. Bullion bars
These are good modes for investment but the minimum investment here is much higher than a common investor can think of.

5. Gold Exchange Traded Funds (ETFs)
Gold ETFs are a hot option these days. These are like mutual funds that invest only in gold. They are proving to be an easier and safer mode to buy gold. The charges are very less and the gold can be accessed electronically. The disadvantage is that one never gets to ‘see’ one's holdings.

Also read: The best way to invest in gold

Let's, now, understand the features of gold as an investment.
1. Current income
Gold in any form does not give any current income. The only exception is the dividend option in the Gold ETFs - if held in the physical form, there is only outflow of cash for the maintenance of lockers.

2. Capital appreciation
Historically, gold has been the perfect hedge for inflation, but in terms of absolute returns gold has fared rather poorly giving returns at only 0.8 per cent above inflation. Real estate and shares beat gold squarely on the capital appreciation front. Real estate and shares have given returns of about 11 per cent over inflation since 1979 (1979 as that was the year the index called Sensex was formed).

In the short-run, however, gold is a very strong bet, compared to shares which are highly volatile. The idea for gold investment will be to use it at times when the markets are falling and when the inflation is very high.

A 5 per cent of the overall investment portfolio can be considered for gold investments (bullion, WGC coins, Gold ETFs). Jewelry is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolising wealth.

3. Risk
Gold does not carry much risk at least in India, as we hardly see deflation in the real sense. Even when the official figures where showing negative inflation (deflation) during the last year, the actual prices of food items were increasing. This was reflected in the gold prices too.

The real risk with buying gold is in the opportunity cost of investing in other avenues that can actually give higher returns.

4. Liquidity
Gold scores the highest in terms of liquidity, compared to all other investments. Banks would give you a jewelry loan. Gold jewelers would exchange your gold possessions for other gold jewels. But the problem is there is going to be making and wastage charges involved again. Here you lose the value (to the extent of 10 to 35 per cent) of gold jewels.

An unfortunate social aspect in most families in India related to liquidity is gold has sentiments attached and is the last item to leave the house in case of financial difficulties. This negates the entire purpose of having gold.

Remember: Many banks do not give loans on coins including their own.

5. Tax Treatment
Gold suffers capital gains tax as per the Income Tax act. So it is better to ask your jeweler for the bill. Close to 90 per cent of the gold jewellery traded in India is unbilled. This is a serious problem for those who look at gold as an investment.

We can make use of indexation benefits when calculating the capital gains of gold. So the tax payable will not be much. Gold does not have any other tax benefits.

Conclusion
To look at gold as a hedge avenue, Indians are yet to consider this market actively as the purchases continue to be dominated by jewelry. Gold only beats inflation. It fares poorly when compared to real estate or shares when compared on the basis of real inflation adjusted returns.

Photograph: Vipurva Parikh



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