Even non bank financial companies (NBFCs) who till last year were gung ho about lending money against gold jewellery, have been snubbed. NBFCs can now only lend up to 60% of the value of gold that is being offered by the borrower as against 80% to 85% permitted earlier.
The government's push behind making the shine of yellow metal less attractive to Indians is understandable. India has traditionally been the biggest buyer of gold in the bullion market and demand typically rises around October and November. This festivity of Diwali is immediately followed by the wedding season that carries on till the fag end of the calendar year.
However, this is not a reason to cheer simply because the import of gold makes it a large contributor to the current account deficit of the country and in turn puts pressure on the rupee.
Gold imports in the year 2011-2012 rose to the level of USD 62 billion as compared to a total of $43 billion in the previous year and this has had the current account deficit soaring to 4.2% of the GDP, which is a record 30-year high!
The Reserve Bank of India too has made it clear time and again that till such time as the high fiscal deficit and the current account deficit are not brought under control the chances of reducing interest rates are low. But much as these reasons hit the headlines every single day, it has done little to slacken the demand for gold in its physical form.
Other Forms of Physical Gold
If you are a staunch believer in owning gold in its physical form, invest in gold coins or gold bars. If you are saving for an upcoming marriage in the family, do not buy jewellery that may go out of fashion in time. Instead, buy gold bars and coins from banks or jewellers. This is hallmark gold. So, you can be assured that you are getting pure gold and will not lose out on making charges when you go out to sell them for jewellery.
However, the disadvantage of buying gold in the form of coins and bars is that while banks sell such products they do not buy it back from their customers. The other problem is that you have to buy this form of gold at least at a 5% to 10% premium. You will not be able to recover this cost while selling it though because when you sell, it is at a discount of at least 5%. Having said that, it is still considered to be a better option instead of investing in gold jewellery.
Gold ETFs
If investment in gold as an asset class is on your mind, this form of paper gold is perhaps the best way of investment as financial planners unanimously concede. All you need is a demat account and you can start with your investment.
If you are a beginner, you can start with a very small amount of say one gram and keep up your investments from time to time according to your convenience. Gold ETFs also come with a systematic investment plan (SIP) option so that you can choose to put in a monthly sum into these schemes, just as you do with any other fund.
However, if you are expecting them to be as liquid as physical gold, you may be disappointed as it takes its own course to sell units of an ETF just like it is with any other stock that you invest in. Also, make sure that you check the credentials of the funds offering such an ETF so that you do not get locked away in a fund that is simply illiquid.
The best known gold ETFs in the market today are Kotak Gold ETF and Gold BeES from Benchmark, which was a pioneer in launching such a scheme. Over the years both fund houses have rewarded investors with handsome returns.
E-Gold
In a sense this is an option which gives you the best of both worlds. You need a demat account to transact online in this fund and you also get to take physical delivery of gold albeit on some conditions. Your regular demat account will not work as you will need to have an account with one of the empanelled depository participants. E-gold was a platform launched by the National Spot Exchange (NSEL), which also offers a similar investment option on silver and platinum as well.
One unit of e-gold equals one gram of physical gold. If you want to save for your child's marriage in the long term, it is best to go the e-gold way. In its functionality it resembles a gold ETF and can be bought and sold like shares. This is the best way to invest in gold in small quantities and be completely hassle free and tension free as you do not have to bother about picking up the insurance or storage cost.
When your target is achieved, you can take delivery from the exchange and use it according to your requirements. If you have bought e-gold units for investment purposes only, you can sell them off whenever you wish in lieu of cash.
Hedging Through Gold Futures
This is not so much an investment but a hedging tactic that is used by those who are used to trading in gold. What these futures essentially do is they protect you against a future price hike. For instance, if the price of one unit of gold is Rs 31,000/10 gm now and a future with a tenure of three months is available at a price of Rs 31,500/10 gm, you can lock yourself at this price and protect yourself against price fluctuations in the short term. However, this may be an oversimplified explanation and truth be told you need to be savvy with a little bit of technical knowledge to understand how futures operates.
The bottomline however is that investing in gold is a viable option at the current state that we are in. But instead of rushing to the jewellery store think wisely and choose the option that you think is best suited to your investment goals.
Source: Nirmal Bang's Beyond Market
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