Friday, March 13, 2009

WHY YOU SHOULD ONLY INVEST IN PHYSICAL GOLD AND NOT IN ETFs and GEFs?


In my earlier post we evaluated Gold as an investment option and why it should be a part of every prudent investor. There are primarily 3 ways in which one can invest in gold. They are :

1. Buying physical gold
One of the most ancient and popular way of investing in gold has been through the purchase of physical gold either in form of gold bars, gold jewellery or gold coins etc.Most of the families in India do indulge in gifting gold ornaments to the bride on her wedding night.This in most cases forms bulk of the gold investment that bride has throughout her life. Few others invest in gold bars or gold coins. This is the most popular form of investment in gold in most of the countries even today.
2. Exchange Traded Funds (ETF)
As the wikipedia an exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. In Gold ETFs the underlying asset is gold.Simply put in Gold ETFs , companies collect fund from investors and invest it in gold on investors behalf. the investors are issued units in the Gold ETF which they can redeem whenever they want in exchange for money. These funds offer an option of investing in gold to an investor without really having the trouble of holding physical gold. Helps them save money which they would otherwise spend on safety and security of the physical gold. In India too gold ETFs are available.

3. Gold Equity Funds (GEF)
These are equity funds which invest in companies involved in gold mining. They only invest in companies which have control over gold and its production. Its pretty much similar to a mutual fund investing in gold mining companies.
So, as an investor we do have few options before us if we want to put our money in gold. Which one of these is really the best way of investing gold? Which makes more sense to an average investor?
Well there are no easy answers to this since each of these methods /funds have their own intrinsic advantages,but, if one really were to ask me I would say that the best thing to do is to invest in physical gold. The reason is simple , and that is that since it will give you physical control over the asset you invested ie. gold.This is very important advantage which ETF and GEFs dont offer you. In these difficult times when you have every second financial organisation going belly up , investing in ETFs launched by them is not risk free , since if they go bust you would be left with only claim on the gold invested with them , NOT the real gold. So this is a big risk one needs to avoid. Also some experts believe that while companies launching gold ETFs are supposed to only invest in gold , this is not true with all companies at all times and hence it exposes you to even greater risk. In bad times , you would want to have your gold with you not with some company and hence investing in physical gold is the way to go.
As regards GEFs, they are exposed to the limitations with which the gold mining companies operate. They will have their own set of challenges like macro economic factors like gold prices, economy, dollar exchange rate etc,micro economic factors like labor issues, wage issues etc. All these will make their operation dependent on too many things and hence the returns of GEFS may be quite volatile.
So, in the end can safely suggest that if you want to invest in gold, do just that i.e. buy physical gold. And yes buy gold bars/coins not jewellery since jewellery will have cost associated with it in terms of making charges which will reduce your overall return on the asset.

Also check out this video where its explained why physical gold is the way to go..

Stay wise n Stay wealthy...


No comments:

Post a Comment