Why gold etf/e gold? Why not physical gold?

#1
Friends, it's been some time since I posted on traderji, although I have been visiting the forum.
I was planing to invest some money in gold and was pondering over the options. Everyone is talking about gold ETFs and e gold but I am thinking why these and why not physical gold? The reason being, I had purchased some gold coins a few weeks back from a jeweller in Bangalore. I paid that days gold price plus 1% premium and another 1% VAT. If I sell it back to him he ll pay me Rs. 25 less per gram to that days price. So the additional charges incurred are just 2% plus Rs. 25 per gram loss that I inciur while selling it. At the max it comes to 2.5% additional charges may be 3%.
If I buy ETF, I pay 1% fee year to the fund management company. If I plan to keep gold for more than 3 years ETF seems to be a more expensive option.
Now e gold works out cheaper than etf and gives additional benefit of converting the units to physical gold but the price of e gold on nsel is typically 150-200 rs more than good prices at current market . So if I plan to convert my e gold to physical gold later on I lose out on this difference plus I need to pay VAT also.

Under these circumstances I was wondering is nt it more advisable to go for physical gold in form of coins or bullions instead of paper or electronic gold specially if u plan to hold it for some time?

Views please..
 
#2
I'm not very familiar with commodity investing, but I believe one reason why the 1% per year expense for ETFs perhaps has to do with storage costs. If you purchase gold directly, the onus of protection, storage and purity check falls on you directly, but in the case of ETF, it falls on the fund creator and you as an investor are guaranteed a pure product safe and sound.

No other reason comes to mind right now regarding the difference in cost. If you plan to just buy a small quantity and hold it for long, I suppose pure gold would be a good way to go about it. If you plan to constantly add to your gold portfolio, ETFs may be a good idea. Also, for someone who doesn't have a lump sum amount to invest in gold, then ETFs and Gold Funds could be a good option!
 

mastermind007

Well-Known Member
#3
vibhunair

I agree with your thinking. Except for taxes and convenience, ETFs does not really offer anything. Yeah Yeah I know that many of them advertise that they'll purchase real thing and store it for you.

Forgive me for being a cynic, but If you've ever done business, you'll realize that it would be might impractical and 1% maintenance just cannot cover it.

At the end-of-day, if you are a long term investor and buy ETF you are purchasing pieces of paper (or electronic PDFs) at price of Gold. Having said that, its very handy for short-term speculative trades. If I were purchasing for daughter's marriage, I'd go with the physical Gold and get a good bank locker.
 

THETRADER

Active Member
#5
Physical Gold -
You are tied to the same seller. Others may not offer the same price.
There may be making charges, waste, etc., on your buying. You may not get back these when you sell it back, or you may even be charged on some account similiar to these.
You could make a test transaction with a buy and sell and compare your transaction costs. Then you could come to conclusion about the actual transaction.
These charges and contracts are verbal. They may change tomorrow.
 

jamit_05

Well-Known Member
#6
Why are Gold ETFs of different Banks priced differently? Does it affect the buyer, I mean, if HDFC is trading at a 60 point premium, then could that premium vanish in the short term?

In addition, are there any expenses in buying ETFs (like in Mutual Funds)

 

jamit_05

Well-Known Member
#7
vibhunair

I agree with your thinking. Except for taxes and convenience, ETFs does not really offer anything. Yeah Yeah I know that many of them advertise that they'll purchase real thing and store it for you.

Forgive me for being a cynic, but If you've ever done business, you'll realize that it would be might impractical and 1% maintenance just cannot cover it.

At the end-of-day, if you are a long term investor and buy ETF you are purchasing pieces of paper (or electronic PDFs) at price of Gold. Having said that, its very handy for short-term speculative trades. If I were purchasing for daughter's marriage, I'd go with the physical Gold and get a good bank locker.
If you purchase physical gold, then LTCG applies after 3 years. Whereas for ETF 1 year. Taxation on Gains is indexed on both.

Secondly, if you buy gold jewellery, then you pay around 15% more. So one transaction covers around 15 years of ETF expense ratio. Gold coins are around 4% more expensive, due to tax and premium of physical delivery. Plus the risk in both.

I think if you buy etf of sbi or hdfc you should have no problem cashing it anytime in the future.
 

jamit_05

Well-Known Member
#8
Friends, it's been some time since I posted on traderji, although I have been visiting the forum.
I was planing to invest some money in gold and was pondering over the options. Everyone is talking about gold ETFs and e gold but I am thinking why these and why not physical gold? The reason being, I had purchased some gold coins a few weeks back from a jeweller in Bangalore. I paid that days gold price plus 1% premium and another 1% VAT. If I sell it back to him he ll pay me Rs. 25 less per gram to that days price. So the additional charges incurred are just 2% plus Rs. 25 per gram loss that I inciur while selling it. At the max it comes to 2.5% additional charges may be 3%.
If I buy ETF, I pay 1% fee year to the fund management company. If I plan to keep gold for more than 3 years ETF seems to be a more expensive option.
Now e gold works out cheaper than etf and gives additional benefit of converting the units to physical gold but the price of e gold on nsel is typically 150-200 rs more than good prices at current market . So if I plan to convert my e gold to physical gold later on I lose out on this difference plus I need to pay VAT also.

Under these circumstances I was wondering is nt it more advisable to go for physical gold in form of coins or bullions instead of paper or electronic gold specially if u plan to hold it for some time?

Views please..


No matter what route you take, if you acquire physical it will attract VAT and premium, which are unavoidable.

ETF will suit the ones who:

1. Find physical Gold Risky. Biggest reason. For which 1% expense ratio is justified. Just like insurance.

2. Wish to do SIP at certain levels and hence prefer ease of transactions.

3. Want to avoid the hassle.
Various stores display different prices as per their stock and view of the near future. Plus, once purchased you cannot challenge the purity, but can be surely be doubted.
 
#9
Interesting thread friends...with due respect to all of your views I have the following thoughts over physical and ETF gold:

Recently when we saw the gold prices dropping to 25000 in 2013 crash, most of the jewelers refused to sell gold at such low prices and started hoarding. At such times ETFs are the way to go as you can easily find liquidity in ETFs on the exchange.
:)

Secondly, who knows the fair value of gold? for a matter of fact you go to 5 different jewellers and they will offer you 5 different prices. This is not the case with ETFs. in addition to this, you are relieved from burden of storing and theft of losses/robbery as your holdings are safe with the exchange.

One of my friends stated a very interesting point about storing physical gold for marriages. I have a slightly different opinion on the same. Choices change,,,trends change,,,same goes for gold. If you would want to sell gold jewellery whcih you purchased 10 yrs before you would lose money on making charges and selling back would also include arguments over purity of gold. Instead you can keep holdings in form of ETFs and sell them at time of need and then purchase physical gold for gifting purposes.

Just for your information: Long term capital gains on gold ETF can be claimed after 1 year itself :)


To some extent I find this product an amazing investment instrument :D

Happy Trading my Friends !!
 

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