Gold- The dangling metal Oct, 18 '10 Subject: All about gold, Viewed by: 0

India has a history of being fascinated with gold. The shiny metal continues to be one of our biggest private wealth hoards, and its use in India makes up about 20% of the world's gold consumption every year. Consumption of gold is likely to peak on Dhanteras - five days before Diwali - when, in keeping with tradition, buying the precious meta is considered auspicious. More than just investment Gold prices have been going up over the last year and at about Rs.19,000 per gram, they are near the highest ever. Is this, then, the right time to buy gold? The answer depends on why you want to buy gold. Bought as jewellary, gold is actually useful when it comes to deflecting the conversation from going to embrassing territory. You feel good about owning jewellary and you can use it to swiftly change the topic of conversation. So buying gold does have other benefits than just being an investment. To many of you, these other aspects may be far more important than something as clinically boring as market value, and if you belong to that category, then you should probably read no further. Investing in gold has only two theories: a) Gold is a store of value. No one can take it away from you, or make it lose value, like inflation does to paper money. b) Gold is useful to convert to cash in case of emergencies. Fixed Value Take these two and now consider the various ways you caninvest in gold. First, let's understand how the value of gold comes. It's not like a 100 rupee note, which is worth 100 rupees no matter which 'edition' it is. Gold is measured in terms of purity - in carats - and weight. The higher the carat, the costlier gold is, per gram. You can buy gold jewellary in the form of beautiful, wearable ornaments like, rings, necklaces, chains and more. What this involves is multiple components. First, you have to select the jewellary from a shop you trust. Making jewellary involves more than just the cost of gold. There are making charges and wastage, and these can add a good 10-20 percent to the cost of what you are buying. Importantly, you must ask your jeweller for a certificate of what carat or weight the gold is, so that if you should want to sell the gold, you can, at the very least, sell it back to the same jeweller. The downside; when you sell it back, the jeweller will charge you wastage and making charges all over again, plus they have a lower buying rate compared to their selling rate. The charges for a round trip transaction can be up to 40% and the transaction costs are horribly high, which is one of the reasons why you should sell jewellary as your absolutely last option. Go for bars Another, and much better way to invest, is the gold bar or coin. A kilogram of gold costs you Rs. 19 lakh today. Almost nothing else concentrates so much value in the size of a golf ball. Indeed, all of the mined gold in the world - about 1,65,000 tonnes of it - will fit in a cube about seven storeys high. You can buy gold coin at your local jeweller, where you must ask for an assurance that if you sell it back, he'll pay you for the same purity and weight. Regardless, do some basic checks on quality. There should be a BIS mark on the coin or bar, and you can get the coin tested at a different shop for its purity and weight. You can also buy gold from banks nowadays, but don't. While banks can sell you gold, they can't buy it back. And the same gold, taken to the jeweller, will get you a price 20 to 40 percent lower than the buying price because banks charge a much higher rate than jewellers. There is one more option and I encourage this route: buy a gold exchange traded fund (ETF). ETFs are bought or sold on the stock exchanges, where all you need is a demat account and a broker to be able to purchase gold. You buy it like you buy a stock, except, for every stock that you own, the ETF issuer will have real gold stored in a safe place. Safe and secure Why do I recommend this? For one, there are no storage and security problems. Gold, regardless of how rich you are, needs to be stored safely and locked, because it can be stolen very easily. With an ETF, you need not worry about security for any quantity of gold, since the ETF issuer takes care of it. Also, you have no worries about quality, since the issuer guarantees the quality. Plus you can buy small and large quantities without creating any curiosity. If you go to a jeweller to buy a few one-kg bricks, you had better have some serious security for the next few months. Lastly, and ETF doesn't have the same feel as physical gold, which means you can sell it without feeling like you've sold an heirloom. The downside of the ETF is the one percent or so that is charged as management fee and over ten years, the ETF is likely to diverge form the real underlying price of gold. There are gold ETFs form many fund houses, like Reliance, Benchmark and Quantum. Another way to participate in gold markets is by buying futures where you get the ability to buy gold later at a locked-in price, but I wouldn't advise it to newbies. Gold is viewed as a hedge against inflation, or as a call-to-safety. In time of crisis people run towards this yellow metal, and given that our world seems to either get infected with crises on a regular basis, or has high inflation when the going is good, we can only expect gold to go higher in price.