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Pradeep Chandrasekaran

The Sage was bemused as he picked up the newspaper. A new record had been established for the amount of money that the gold industry had been able to raise in two days on the hype of Akshaya (never diminishing) Tritiya. The sustained savvy marketing campaign had paid off. Cricket, films, real-estate, gold — the Akshaya list of things packaged and sold was growing longer. Gold dream sellers and hunters of a bygone era would be rolling in their graves seeing the aggressiveness of the current generation.

As he flipped through some of the advertisements which preceded the AT Day, the Sage's eyes fell on a page full of pictures of tinsel world stars.

"So, what are your plans for AT?," was the question posed to the stars.

And the unanimous answer: "I will be shopping for jewellery. Gold is the only investment which keeps going up in value."

That is interesting, but maybe they have not been checking the prices, the Sage thought. They would possibly squirm if they saw what has happened to gold prices since the AT day, he mused.

As he was stepping out for his morning walk, the Sage ran into his neighbour. Without any of the customary greetings, the question which was shot at the Sage was the inevitable, "So, did you buy gold yesterday? I picked up gold coins from my bank."

Ah, so the banks have also got into the act, thought the Sage, but said: "No, I did not. I did not think it was the right time to buy gold."

N: But don't you see the newspaper? There is an advertisement by a Gold Club which says that between 1975 and 1999, gold prices went up by 6.3 times."

S: "Aare Yaar, which century are you in? In case you didn't know Y2K came seven years back.

N: "Of course, I know that, but you didn't answer my question. If gold prices went up by 6.3 times, it should be a good investment. Everyone in my office also says so."

S: "Ah, so the crowd psychology is again at work. Why do you always have to do what the others are doing? Why can't you learn to do a bit of study and rely on your own judgment? And act on what your head tells you, not your heart."

N: What do you mean?

S: First, I want you to understand that the price of investment class assets whether they are real-estate, gold, silver, shares or interest rates go up and down depending on whether they are in a bullish market or a bearish market. Let me show you something which will open your eyes.

Look at the chart. It is of gold from the New York Mercantile Exchange. Indian gold prices move in tandem with the international prices of gold. Can you see that gold touched a historical high around the $880 mark in 1979? And then came crashing down to $280 in 1982?

N: "Yes" (barely audible).

S: Can you also see that gold prices have since then fluctuated sharply between $520 and $250 between 1982 and 1999?

N: "Yes".

S: "It was only from 2001 one that gold prices staged a strong recovery. However, there is nothing to prevent gold prices from crashing again."

N: "So do you mean to say that one should not invest in gold?"

S: "No, not at all. On the contrary, gold is an excellent investment vehicle to add to one's portfolio. What I am trying to make you understand is that there is a time to buy gold and a time to sell gold — and that time is not the time determined by savvy marketing gimmicks of the gold industry."

N: "So, what should I do?"

S: "Well, obviously, you have got to develop the skill to analyse the prices of gold and any other investment class which you wish to invest in. Incidentally, Indians have now got a tremendous vehicle for investing in gold through Exchange Traded Funds (ETFs)."

N: "What are ETFs?"

S: "They are a kind of mutual fund. The main difference between an ETF and a normal mutual fund is that the ETF is traded on the stock exchanges just like a regular share. This provides a number of advantages and to me, is the true vehicle for gold investment."

N: "How?"

S: "For one, the cost of buying and selling the ETF is very low and is the same as the normal brokerage rates you would pay for buying and selling shares.

Second, the ETFs can be held in dematerialised (electronic) form which obviates the physical safety of gold.

Third, there are a number of tax advantages. There is no wealth tax liability since gold is not held in physical form and further since there are no securities involved, the Securities Transaction Tax (STT) does not apply.

Fourth, I can buy as little a quantity of gold as I want. The smallest lot of one unit is equivalent to one gram of gold and I could be buying even in lots of one unit. Fifth, there is no making charges or wastage as in the case of jewellery."

N: "Where can I get the ETFs?"

S: "In India, there are two gold ETF's which can be considered for investing — the Gold Share launched by the UTI and the Gold Bees launched by Benchmark AMC. They are both traded on the NSE. Both the mutual funds have appointed the Bank of Nova Scotia as the custodian (safe-keeper) for the gold bought on behalf of investors. The gold held by the custodians in both these schemes will be 24 carat gold.

Further, the gold held by the custodian will be fully insured and cannot be used for lending. Perhaps, the biggest advantage of investing in gold through an ETF is that I can analyse the same just like a share.

This enables me to identify the cycle in which gold is. Based on this, I can decide whether I should invest in gold or whether I should be disposing of my gold units."

As he saw his neighbour out, the Sage could not help a final repartee, "It may not be a bad idea for you not to eat and drink everything which the stars recommend, or for that matter invest wherever they tell you to."

Racy@TheHindu.co.in

http://Racycases.blogspot.com

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