Reap a GOLDEN Harvest

Source: Dalal Street.

Gold as an investment option is now making rapid inroads into the Indian psyche but most buyers make the cardinal mistake of simply purchasing gold from retailers rather than checking out the option of buying it from a bank.

Golden Pointers

1. Buy gold bars and coins instead of jewellery for investment. You may not get a good price for jewellery because of the making and processing charges involved.
2. Look for 'PAMP Swiss' gold sign or 'Assay Certified' on gold bars and coins. It is a sign of quality and purity.
3. Buy only from an established bank.
4. If you sell gold before three years of buying it, you have to pay 30 per cent capital gain tax and
5. 20 per cent if you sell after three years.

  

For And Against

The main reasons why gold finds a place in many portfolios include:

1. Gold has historically proved to be a good hedge against inflation.
2. It is liquid and can be easily converted into hard currency.
3. It has ornamental value, more so for Indians.

On the other hand, investment in gold also has its disadvantages such as:

1. It does not provide regular current income as, for example, debentures which pay interest. In fact, gold bonds did not take off and lending of gold for a fee is not a viable option for retail investors.
2. It does not offer any tax advantages as, for instance, investment in a infrastructure bond that entitles one to certain tax advantages
3. There is a possibility of being cheated with respect to the purity of the metal except when buying from banks.
4. There is a storage cost involved in preserving gold.

When it comes to gold and especially jewellery fashioned out of it, Indians have more than just a materialistic value attached. There's an emotional bonding too. That's because, traditionally, Indian families have not only viewed gold as the safest mode of security but have found an ample use for it to cement relation- ships by way of marriages, as goodwill gestures on the arrival of a child, gifts during festivals and so on. Gold, in our country, denotes love and affection. It is also used as a mark of respect and tribute. As such, it is common enough to find Indians keener to know about the fluctuations in gold prices than anything else.

With the global demand for gold touching new heights in the second quarter of 2008 (rising 9 per cent on a YoY basis) it seems to be a good opportunity for investors and gold lovers. The market is growing at a galloping rate of 12-15 per cent per annum. The domestic jewellery market is approximately to the tune of Rs 64,000 crore, of which almost 80 per cent is gold jewellery. The main driver being the investment factor, middle class and high net worth individuals (HNIs) buy gold keeping in mind that it could always yield good returns. Gold prices has been on an upswing and prices have doubled in three years.

At $ 21.2 billion, the global demand for gold reached new heights in the second quarter of 2008, rising 9 per cent as compared to its earlier levels. The global investment demand for gold showed the strongest surge, reaching $ 3.5 billion in Q2 2008, 29 per cent higher than Q2 2007, with particular strength in the US, China, Egypt and Vietnam. As our interaction with experts in the gold sector indicate, the best form in which to hold gold, from an investment perspective, is probably as gold bars (or, as is termed, biscuits). Gold bars are standardized products whose purity is assured by the hallmark (seal of the producer) that each of them carries. There are no charges levied for making them and as the purity and quantity is assured, liquidation of these bars does not spring nasty surprises.

Many individuals are not too sure about the factors that need to be kept in mind when purchasing gold. People have often found themselves cheated when jewellers who have promised a quality standard of 22K have actually

delivered something not at par. The best way then to eliminate the risk of being 'taken for a ride' is probably to

spend time in selecting an honest and trustworthy source or an institution like a bank to make the purchase.

SOURCE AND FORM

As an investor looking for an assurance about the quality and purity of the product, the one place which can be deemed trustworthy in all respects is a bank and not a local jeweller or retailer. What one needs to under-stand is that banks sell gold based on guidelines defined by the Reserve Bank of India (RBI), which cannot be questioned or doubted. According to the RBI, banks can sell gold which is Assay certified and with tamper-proof packaging. This basically implies Swiss gold. One limitation is that gold bought from a bank cannot be sold back to it and when sold to a jeweller it yields a lesser value com- pared to its purchase price for the simple reason that there is now involved the cost of melting and reprocessing the gold.

From an investment point of view, one should invest in bars or coins and not in the shape of jewellery. You may not get a good price for jewellery because of the crafting and processing charges involved. One of the reasons that points in favour of adding gold to your investment portfolio is that it is a real asset whose value is driven by factors such as the amount of gold mined which are very different from those that impact the value of financial assets. Another reason is that gold is a good hedging tool against inflation. Therefore, it brings in a much needed

element of diversification as also security in a portfolio.

BRISK BUSINESS

In the past few months, banks have become rather aggressive in marketing gold bars. This escalation in the tempo

is due to the fact that banks have been trying hard to take advantage of the slump in the stock market. A bank will definitely give you a certificate assuring you of the purity of the gold, which a retailer will not. And that's why they charge a premium on the price.

Essentially, if you want to feel secured and comfortable about the gold you have bought, it is better to have certified authenticity rather than find at a later date that you have been cheated. When it comes to re-purchase options by a bank and a retailer, the former does lose out.

PARTING WORD

But even after you have made up your mind to buy gold from a bank, don't rush to the nearest one. Our reality check revealed that there is a lot of price variation by way of each bank levying its own premium rate. Therefore, do your homework well before you buy gold.

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