The curious case of GOLD
and other precious metals…..
In the above chart notice the ever-increasing price gap between gold and silver. This chart depicts the value of US$/OZ for every metal. Gold is primarily used in jewellery whereas the other 2 metals have various industry applications. Now coming to the rarity of these metals.
Gold — 4 parts per billion
Silver — 75 parts per billion
Platinum — 5 parts per billion
Yes, silver isn’t as rare as gold or platinum but the EV industry has just started to bloom and silver is a major component of this industry. So when demand increases with limited supply so does the price!
WHY buy these?
- Always act as a hedge in our evermore uncertain world.
- Precious metals in general are short in supply.
- There is a vast price gap between gold and silver today, which is likely to close with the massive need for silver in the EV industry.
- It is easier to liquidate compared to other traditional illiquid assets such as real estate.
- Easier to get loans with better interest rates compared to personal loans. Here I compare gold loans to personal loans as both are availed only in times of need, assuming every other household generally has home loans or already pledged homes.
Options to buy GOLD today
- Jewels
Don’t all Indian households love buying jewels? Well even though the designs are great, you are losing out BIG-TIME when it comes to the making costs. On average you are likely to pay anywhere from 17–20% of the value in making charges itself! So that means less gold for the same price. Another thing to note is that Gold jewellery comes with HUID which basically tracks information such as the owner’s details, the store from where it was bought and when it was bought.
Apart from this jewels are made of 22k gold rather than pure 24k.
- SGB
An initiative by the Government to tap into the gold savings market of India by selling these Sovereign Gold Bonds. What are they?
These are bonds issued by RBI and backed by the Government of India as a proxy to your gold purchase. In a sense, they mimic the per-gram price of the gold at the time of buying and maturation of the bonds.
For instance, you are buying the SGB today when the per-gram price of gold is INR 5000 and say the bond matures in a year when the gold prices are INR 6000. During this bond period, since you don’t get physical gold in your hands and to promote this form of ‘paper gold’ the government gives an interest rate of 2.5% p.a. Other reasons you might prefer SGB over physical gold are the threat of theft and the ability to sell and buy these bonds on the secondary market. Do note that these bonds aren’t very liquid on the market. You could identify SGB in the market like so, SGBOCT25V — where OCT indicates the month of maturation, 25 indicates the year of maturation and V indicates that this is the 5th tranch of bonds released by the government.
We discussed the advantages till now but there are also some disadvantages. In the worst-case scenario, if the government defaults, you may lose the money you have invested in SGBs. Also, there is an upper limit as to how much you can hold, 4 kilograms for individuals and HUFs and 20 kilograms for trusts and similar entities in a fiscal year. Apart from this interest earned on the SGBs is taxable and the capital gains made on the bond are tax-free only if you hold it to maturity.
- Actual coins/Bullion
You can buy coins starting from 1g at any jewellery store. The jewellery store does add a making charge amount anywhere from 8–10%. So for example, 1g of gold costs INR 6000 then you’ll end up spending INR 6480(8% of 6000)–6600(10% of 6000). Usually, these jewellers accept back the coin at a later date and would give you the market price of gold for that day, in case of an emergency.
You can choose to buy gold in 24k or lesser purity.
- Gold ETF
Apart from SGBs, there are Gold ETFs that you could invest in an SIP format. Note that there are entry and exit loads.
- Gold savings schemes with the jewellers
This is something that any known jeweller like Titan or Reliance will try selling you. How it usually works is that you pay a certain amount every month for 12 months and if the instrument is for 12 months the last month the company pays the due for that last month, essentially the 13th month. Then you get the amount in gold back. This is from my understanding of when someone tried selling me this scheme.
Options to buy SILVER today
- Jewels/Ornaments
- Silver ETF
There isn’t any instrument similar to SGB for this metal. ETFs are listed on the open market but do note the entry and exit loads. This is a good option for SIPs.
- Actual Silver Bullion(Not very famous)
This isn’t a common option. I have personally tried buying silver from a jeweller. The one disadvantage compared to gold bullion is the making charge. Since silver is a harder metal, the making charges are in the range of 18–20%. One plus is you’d get a lot more silver vs. gold for the same amount.
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There currently is no investment instrument for Platinum in India. However, you can buy platinum jewellery but do keep in mind that it isn’t pure 100% platinum.
Gold is and always has been a safe asset that keeps up with inflation and doesn’t erode in value. But if you look at the rarity and the increasing use cases of silver and platinum, at the moment it seems like a good option to think about them from an investment perspective. Another observation from the graph above is that at times platinum has beaten the price of gold and hence there is more scope for demand and growth for platinum.
Note: All the mentioned options are keeping in mind the average retail investor of today.
