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Different Way to Buy your Gold

Different Way to Buy your Gold

Debajit Saha, Editor, Bullion Bulletin

Little to say about India’s love affair with gold. India consumes around 750 to 800 tons of gold in a year and there is no denying of the fact that this consumption will continue. Majority of this gold is consumed through form of jewellery and this tradition again will continue. It will continue because gold is considered as ‘auspicious’ and it is bought for the well-being. It is an age-old tradition and a tradition normally takes enormous time to change if it intends to be, or, to say, some traditions never change. Fair enough!

India’s social structure is perfectly fit to accommodate gold jewellery inside its system. India’s is a society which follows religious customs and beliefs closely and in that respect our marriages, festivals, other social functions cannot be complete without jewellery, primarily made out of gold. This gold is additionally considered as store of value which can be utilized for many reasons in future as gold is as good as ‘liquid currency’.

If it is the state of affair, then what is a point here for any discussion! Well, there are other options available in India today through which people can buy gold, and here we need to enlighten ourselves a bit. This gold certainly does not serve the purpose of social obligations, but certainly serves the purpose of second point mentioned earlier and that is ‘store of value’. Gold bought through these new options are equally liquid and easily encashable at times of need, besides, it is cheap and easy to hold securely. Yes, I am talking about some of the new products available in Indian market, viz, gold ETF, sovereign gold bond and digital gold.

Gold ETF

To talk about gold ETF, well, it has been a tremendous success in the west since it was introduced in 2003. Structurally, Gold ETF is a unique investment product, where units (securities) are issued to investors against the gold stored physically in a custodian vault. These units are tradeable on the stock exchanges. Introduced in 2007 in India, gold ETF gained traction during the bull-phase of gold market until 2011. At the peak over 40 tons of gold was accumulated under the scheme. However, high transaction costs and fall in gold prices have eroded their popularity in recent times. The failure is not only visible in India, but also across Asia. Asia is largely a physical market where jewellery is the most preferred form of holding gold, when West is an investment market where gold is considered as an ‘asset’. World Gold Council data shows, as of 28 February, 2018, total gold holding in ETF stands at 2393.4 tons, and out of which, only 90.7 tons are held in Asia. It means Asia has a big scope to build this product and India and China can play the most important role as these two countries consume half of total gold consumed in a year. Trading in gold ETF is as simple as trading in equity and any individual having online ‘trading and demat’ account can trade in gold ETF. National Stock Exchange of India (NSE) also stopped promoting Gold ETF on behest of government when country faced huge CAD problem and since Gold ETF calls for physical holding of gold, government discourages this product

along with suspending selling of ‘imported’ gold coins and bars in banks.

 

  

 

Sovereign Gold Bond

Sovereign Gold Bond is the new product launched in November 2015. This is a unique product having a sovereign guarantee which means, investors cannot lose money. Investors are assured of getting 2.5% interest per annum payable semi-annually on the nominal value. Investors will also get all the benefits of any price appreciation of gold at the time of maturity. The bond is exempted from GST, which otherwise buyers have to pay if they wish to buy physical gold. This gold again is cheaper than physical gold. On the taxation side, if an investor holds the gold till maturity, capital gain tax is exempted. This gold can also be sold now pre-maturely in the exchange, however, this will attract 20 percent capital gain tax. If we set aside the taxation part, this phenomenon enables investors to sell its gold if there is any sudden need of capital requirement. It again proves holding gold in paper form is as similar as holding in physical gold. Holding gold in physical form is non-yielding, fear of theft if it is kept at home or to bear a yearly cost if it is secured in bank vault. Sovereign gold bond on the other hand is an assured ‘yielding’ asset, and since no physical gold is involved here, investors do not have fear of theft or to pay vaulting charge to secure the asset. Additionally, provision has been given that bond can be used as collateral for loans. The loan-to-value (LTV) ratio is set equal to ordinary gold loan mandated by the Reserve Bank of India.

As per the data available from Reserve Bank of India, till January 4, 2018, the central bank, in consultation with government of India, has issued 21 tranches of Sovereign Gold Bonds for a total value of approximately Rs. 6650 crores or little over $1 billion. This translates into roughly 22 tons of gold.  SGB is absolutely a different asset class as investors will definitely earn the assured interest on the investment; depreciation or appreciation of asset price is part of market process and one should not calculate that part while investing in SGB as market risk is applicable to physical gold as well.

Digital Gold

‘Digital gold’ is another option available in the market which investors can look for. This is becoming very popular in many parts of the world and in India, too, it is now available. In all the places in the world, it is designed basically to serve lower to middle income group who cannot invest large amount in physical gold; it is designed as a product where people can invest in small quantity, gold is held in a vault on allocated basis, and so on. This gold does not provide interest like SGB but enables investor to buy anytime in smallest quantity whenever it is possible.

How is it so? Let’s understand the concept. In India, Paytm gold is offered in popular Paytm app where investors can buy gold as low as Rs. ‘1’. Similar is available now on another popular app ‘PhonePe’. These products are still at its infant stage, and no substantial trade data is available. For example, Paytm started the digital gold service in April 2017 (this gold is actually offered by MMTC PAMP, a LBMA accredited refiner). In the first six month of its launch, it facilitated total sale of $18.4 million. This number is absolutely tiny if we compare India’s total gold market worth more than $30 billion. However, considering the 340 million smart phone users in India at present and as per the projection, it will rise to 468 million by 2021, there is big market ahead for promoting digital gold. The ‘digitally’ held gold does not call for mandatory delivery; rather it can be encashed in local currency at any point of time. Though keeping gold in digital form bears some cost, it is still cheaper than buying jewellery. India’s tech-savvy new generation can utilize the digital gold as an effective vehicle for long-term investment.

Comparative characteristics of different paper products on gold

Gold ETF

Sovereign Gold Bond

Digital Gold

Minimum purchase required 1 gm of gold

Minimum purchase of 1 gm of gold

Minimum of Rs. 1

Investors can redeem the units in 1000 gm in physical gold

As it is a bond, redemption takes place in maturity

Minimum 1 gm of gold can be redeemed in physical gold

Units can be sold in exchange at any point of time. Physical delivery is not mandatory

Units can be sold in exchange before maturity

Anytime gold can be sold

Fund house charges storage cost

No storage cost is applicable

Storage and insurance cost are charged

GST is applied in price

GST is not applied

GST is applied in price

It can not be used as collateral for loans

SGB can be used as collateral for loans.

Digital gold units does not qualify as collateral to loan

There is no restriction of holding gold units in ETF for an individual investor. An investor can accumulate as many units he/she wants.

No investor/HUF can purchase more than 4 kgs of gold in a single fiscal. For Trust, limit has been set at 20 kg per fiscal.  

No such limitations are applicable here

No interest is paid on holding

Interest is paid semi annually to the bank account and the last interest will payable at maturity along with the principal.

No interest is paid on holding

If an investor sold gold ETF in profit after three years, long term capital gain tax of 20% is applicable. Gold ETF also attracts short term capital gain tax as per investors’ tax slab.

Interest on the bond is taxable as per Income Tax Act 1961 (43 of 1961). Capital gain tax on redemption is exempted. However, if it is sold before maturity, capital gain tax of 20% is applicable.

Both short and long term capital gain tax is applicable. 

 

Conclusion

Time has changed. India’s economy is one of the fastest growing in the world.  Average age of workforce is 35 years. For a young developing country like India, it is a tremendous opportunity to look at gold differently. It is a timeless asset; it is time to change our approach. While jewellery stands for a piece of adornment, it is time that people must take judicious decision while investing in gold. Paper gold is always cheaper than physical gold while it comes for investment and this gold is meant for investment by design. It is time to define the purpose and act accordingly.

Disclaimer: Views are personal and not the views of the publisher.