GOLD – an exclusive
Cover Story; by C.S. Kannan S; Money Wise
Gold occupies an unique place among all the metals that man has invented so far. It is the most sought after metal without any disparity of caste, colour, creed or religion and whether you are Asian or European or American or Chinese. Gold determines the economy of almost all the countries of the world. According to World Gold Council, Indian households own about 22,000 tonnes of gold and about 600 tonnes of gold is used in jeweller production each year.
Another statement of World Gold Council says that the consumption of gold produced in the world is about 50% in jewellery, 40% in investments, and 10% in industry. India tops the list of gold users’ world-wide closely followed by China. On an average India imports about 2000 tonnes of gold every year.
Central banks of various countries including the Reserve Bank of India prefer gold as reserve asset. India ranks 11th in gold reserves at 557.7 tonnes of gold as of September 2015. USA tops the list with 8133.5 tonnes followed by Germany with 3381 tonnes of gold. China is in 6th position with 1708.5 tonnes of gold (source World Gold Council). World-wide the gold is used mainly for three purposes viz., 1) as investment 2) as jewellery and 3) for industrial usage.
Despite being referred to as a developing nation and about 24% of the population still striving hard to have even one square meal a day, in a country where death due to starvation, poor nutrition is still happening, the love for gold has not diminished in India, rather it is increasing every year. In the year 2014-15 alone the demand for gold in jewellery form has increased by 15%, the highest in the whole world.
Investments in gold among Indians are generally in two forms. One in the form of coins and secondly in the form of jewellery. Traditionally Indians appetite for gold is safety and safe investment. But, the investment in gold is not productive to the Indian economy. Rather, to meet the huge demand for gold, India is importing gold. Gold is the second highest valued product that India import, next only to crude oil. Such an investment in gold by the Indian household, mainly in the form of jewellery, does not add any productive value to the economy. India is the single largest market for gold and gold products and in fact no other country import gold the way India does. Statistics says that more than 30% of the world gold production is consumed by India. On an average, India imports about 60 tons of gold coins, most of it from Switzerland. In the month of August 2015 alone, India has imported about 113.6 tons of gold. It is expected to be higher during October and November due to the festival season in India. While it is astonishing, it is very much bothering to know that such a huge outflow of foreign currency is in fact harming the Indian economy. More than 70% of the investment by Indians in gold is in the form jewellery. Jewellery once purchased ends up in bank lockers for safety. Thus, it does not produce further to support the economy. That apart, it has a telling effect on the balance of payment for the country.
Time and again, successive governments have been advising the public to refrain from investing in gold or to reduce the investments. On the contrary, the buying of jewellery by Indians is only on the increase. This has led the central government to bring in certain investment policies in gold to contain the severity of gold imports. Recently, Prime Minister Mr. Modi had introduced three different investment opportunities for the investors. The plans were unveiled by the Prime Minister on 5th of November 2015.
The three schemes are:
- Indian Gold Coins, the first ever national gold offerings by the Government of India. The coins will be of 24 karat purity and 999 fineness and will have the national emblem of Ashok Chakra engraved on one side and the face of Mahatma Gandhi on the other. To start with these coins are available in denominations of 5 and 10 grams.
- Gold Monetisation Scheme: This scheme is an attempt to recycle the otherwise idly lying gold in the house holds, temples, banks and such other institutions. Under this scheme, the owner of the gold jewellery needs to melt the gold and get it converted into gold ingots and submit to the authorised Government Agency who will issue a certificate which will bear an interest rate of 2.5% per annum. The investor needs to opt to get the gold in kind or in cash after, say 5 years.
- Sovereign Gold Bonds Scheme: This scheme is to encourage public to invest in the gold bonds which also bears an interest of 2.75 per cent per annum and comes with a tenure of 8 years and an exit option exercisable after five years.
The success of the above schemes depends on the understanding and intake by the general public. While gold coins are generally priced high per gram compared to the other forms of gold, it lacks liquidity and when converted into jewellery, the cost of making and wastages would negate whatever the price appreciation the gold may have over the period. On an average, the making charges and wastages account for 10 to 15% of the total value of the jewellery. We need to wait and see how either MMTC or the Banks would be pricing the coins and what kind of additional features they would give for such investments to woo the investors.
Gold Monetisation Scheme never took off in India. Indians are emotionally connected with their gold ornaments and would never part with them come what may. There are several thousands and lakhs of households in India wherein the gold jewellery of more than a century old are revered and preserved in the same form as it was originally made. Melting the gold ornaments by ordinary public is unthinkable and considering the fact that remaking of such gold ornaments would cost them more in the form of making charges and wastages, which would again negate the 2.5% interest promised by the Government. This is evident in the fact that even after three weeks of its launch, the scheme has just accumulated 400 grams.
The third Sovereign Gold Bonds Scheme looks far better than the other two. It is a scheme whereby the current purchase of gold by the investors is postponed to a future date say after 8 years. In the process the investment would also fetch an interest of about 2.75% p.a. and also the scheme assures a return equal to the market price of gold at the time of redemption. We need to wait and see how the general public view all these three schemes and how do they support them.
To drive home, it is high time that India restricts its gold import and also Indian invests their savings in more productive and development oriented investment opportunities. This will help India to reduce the much imbalance created in its balance of trade and also would infuse money at places where it is really required thereby help improve the Indian economy.
BUYING GOLD …. FEW THINGS YOU SHOULD KNOW…..
Unlike 80’s and 90’s, today buying anything is not a deal. You have money or credit card, it is more than sufficient. You just need to go the shop, choose, pick, pay and return happily with your newly owned possession. Market research shows that today most of our purchases are instant and impulsive. Impulsive buying is motivated by marketing technologies like freebees, discounts, gifts and what not? Purchase of gold is not an exception to impulsive buying. Today every jeweller to name the worth heavily advertises in all the mode of Medias available spending crores of rupees and in the bargain, makes the most gullible, ordinary public to buy the jewellery paying heavy price. If you are buying gold, think several times before doing so and consider the following for a better investment and personal enjoyment.
- Do you need gold ornament today or in the future?
This is the fundamental question to be answered before any one buys gold in any form. If you are buying jewellery, what happens after a few years if do not like the design? You need to exchange it for a new design. In the process you will lose money in the form of wastage and making charges. It would be of wasteful investment for you. Coins? They have poor liquidity. The very banks who sell these coins do not buy them back.
If you are in need of gold ornaments in the future, say for your daughter’s marriage etc., it would be a good idea to buy gold bonds, which much similar to mutual funds could be purchased for small values and are safer. The value appreciation would mostly match the value of gold at the time of redemption.
- Do you have additional and extra cash flow?
This is again more important because, purchase of gold in any form will only result in outflow of funds for the purchaser. Cash in hand is more like one bird in hand than two in the bush. Your gold investment is not set to grow in the proportion of share market or real estate market. It will neither get to any dividend, except few gold ETFs. A comparative study puts gold in bad spot when it comes to return on investment. Hence, it is not advisable to buy gold if you are not having surplus cash.
- Appetite for risk.
If you have a higher appetite for risk, gold is certainly a good investment opportunity. It is safe and as compared to land and building, gold has very good liquidity. In fact, gold has better liquidity than securities invested in the securities market. A piece of gold could be easily sold or pledged in the neighbourhood pawn shop or a bank who would be willing to take it. Higher the urgency, lower the liquidity is the greatest risk one possess. Nevertheless, longer the time one is willing to hold the gold, the better is the return. (See gold prices over the years).
- Taxing tax.
Gold is wealth. It certainly attracts tax. If you are buying gold, please ask for a proper bill from the seller. It would help in case you want to sell the gold at a future date and also protect you from paying unwarranted capital gains tax. Currently, there are no any specific tax benefits for investments in gold. You need to keep this in mind while taking investment decision.
- Safe keeping.
Safe keeping gold is another big threat for gold buyers. While gold do not yield any return on its investment, on the other hand, it may cost you in the form bank charges for bank lockers. While bank lockers could be considered safe, one must clearly understand that there is no insurance claim for any loss in the bank lockers.
From all of the above, it looks that it would be better and safe to consider investments in gold in the form of gold bonds that too in the dematerialised form wherein the risk of loss is nil and liquidity is considerably higher.
🙂 Happy investment in gold 🙂
FACTS ABOUT GOLD………..
- Gold is found on every continent on earth.
- Gold melts at 1064.43° Centigrade. It can conduct both heat and electricity and it never rusts
- A medical study in France during the early twentieth century suggests that gold is an effective treatment for rheumatoid arthritis.
- Gold is edible. Some Asian countries put gold in fruit, jelly snacks, coffee, and tea. Since at least the 1500s, Europeans have been putting gold leaf in bottles of liquor. Some Native American tribes believed consuming gold could allow humans to levitate.
- Gold is used by Indians as part of medicine in Ayurveda and Siddha Veda. Gold powder is mixed with other medicines and consumed.
- The largest gold nugget ever found is the “Welcome Stranger” discovered by John Deason and Richard Oates in Australia on February 5, 1869. The nugget is 10 by 25 inches and yielded 2,248 ounces of pure gold. It was found just two inches below the ground surface.
- Gold is chemically inert, which also explains why it never rusts and does not cause skin irritation. If gold jewellery irritates the skin, it is likely that the gold was mixed with some other metal.
- The Olympic gold medals awarded in 1912 were made entirely from gold. Currently, the gold medals just must be covered in six grams of gold
- The Greeks thought that gold was a dense combination of water and sunlight.
- Gold and copper were the first metals to be discovered by humans around 5000 B.C. and are the only two non-white-colored metals.
- The purity of gold is measured in carat weight. The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East. Carats were the fruit of the leguminous carob tree, every single pod of which weighs 1/5 of a gram (200 mg).
- Carat weight can be 10, 12, 14, 18, 22, or 24. The higher the number, the greater the purity. To be called “solid gold,” gold must have a minimum weight of 10 carats. “Pure gold” must have a carat weight of 24, (though there is still a small amount of copper in it). Pure gold is so soft that it can be moulded by hand.
- Although gold is a heavy, dense metal, it is generally considered non-toxic. Gold metal flakes may be eaten in foods or drinks.
- Gold has many uses, aside from its monetary and symbolic value. Among other applications, it is used in electronics, electrical wiring, dentistry, electronics, medicine, radiation shielding, and to colour glass.
- Never ever borrow money to buy gold. While there is an appreciation in the price of the gold, it in real terms does not get any return to the investor. If one buys gold on borrowed money, it may take years to even break even.
GOLD Price – over the years