Thursday Trivia – Physical Gold v/s Paper Gold

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Thursday Trivia – Physical Gold v/s Paper Gold

‘All that glitters is not gold’ is one of the most fundamental phrases which we use when we are super excited by something which is not worth the excitement.  Time and again, the word Gold has been used interchangeably in many situations showing it’s prime importance.  Historically, Indians have displayed an explainable association with gold, at one point in time, India had so much gold reserves that it was called ‘The Golden Sparrow’.

Physical gold held in bars, biscuits or coins, have always been considered an extremely safe investment because of we can touch, feel and see it.  Also, once we buy it, we are not habituated to look at the price of gold daily.  It maybe once in 6 months or once a year when we see the price and don’t really mind because wherever the price goes, the physical gold can always be accessed.

With the advent of technology, investors have an option of buying gold in dematerialised or paper form.  Paper gold advances the transparency of prices and neglects the risk of storage and theft or misappropriation.  But since it is not held in physical form, there is always a tendency to check it’s price more often than otherwise.  It is just our mindset towards the paper form which makes us react to such changes.  Plus, people become more vulnerable to outside news and start to connect it’s impact on prices of gold which may not have any connection.

For example, when shares were not traded in dematerialised form, investors who did not regularly visit stock exchange were not really worried about the prices.  They were more concerned about the performance of the company over the long run.  But since shares were dematerialised and televisions started to propagate about prices each day, such an exposure lead to massive wealth destruction to such an extent that stock market has been looked down upon in a big way.

Similarly, if a person merely sees paper gold as an alternate to holding physical gold but retains the same level of composure as if he has bought a gold bar, there will not be any impact due to minor price changes. Paper gold provides multiple layers of security as the instrument will be registered with investor, seller, fund house and regulator.  At any point, if the investor loses the documents, he can always place a request with his seller, fund house or regulator for the same which can be accessed through following a procedure which may differ.  Whereas in physical form, once the gold is lost, it is highly unlikely that it can be recovered and the procedure to file the complaint with police is also tedious and tiresome.  So keeping our emotions aside, paper gold might just make more sense!

Paper gold can be purchased through four ways in India :

  1. Gold Equity Traded Funds (ETFs)

    These are mutual funds which are passively managed by simply investing in standard gold bullion. Investors can purchase these by opening a demat account with a broker registered with Bombay Stock Exchange or National Stock Exchange.

  2. Gold Mutual Funds

    These mutual funds are also called fund of funds (FoFs) that invest in either their own Gold ETFs or a foreign gold fund. Investors also have a facility to purchase these funds at a systematic investment planning (SIP), so that they can accumulate by buying little over along period of time.

3. E-Gold-

It is a product launched by the National Spot Exchange Limited wherein an investor can purchase gold in electronic form in denominations as small as 1 gram and can also be converted to physical gold.

4. Sovereign Gold Bonds (SGB)-

SGBs are government securities denominated in grams of gold. The bond is issued by Reserve Bank in tranches on behalf of Government of India and bear an interest rate of 2.75%.  The quantity of gold for which investor pays is protected, since he receives the market price at the time of premature or complete redemption.  SGBs are traded on both the exchanges between the price range of Rs. 3,000/- to Rs. 3,200/-

When it comes to beating the market volatility and paying regular interest, SGB beats all other forms of paper gold.  Even the change in price can be offset by interest component for the investor.  Therefore, it is absolutely advisable to go forth with SGBs for investing in paper gold.

With changing times, forms of holding will change but the inherent nature of gold will always remain the same.  Therefore, it will be very important for an investor to carefully assess his lifestyle and buy the same.  For example, for people staying on rent or moving between cities due to job requirements, it will be more helpful to hold paper gold though for a person who has stays with family and has his work nearby will show a higher inclination towards physical gold.  But the basic principle of staying invested for a long term to create wealth will hold true in both the cases.





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