Buy GOLD in form of STOCKS

This is a very interesting blog in which I talk about buying gold to stabilize your investment portfolio. Buying gold refers buying gold in form of stocks and not the usual buying of gold in physical from a jewelery shop. Gold is used as a tool against stock market risk and inflation.

This blog is directly influenced by OUTLOOK MONEY issue dated 31^st March 2008.

Gold price is inversely proportional to Stock market movement. So when the stock market is at a high the gold price actually will be in the downside. While the stock market crashes gold price is at all time high. That means by adding little gold in your portfolio you can neutralize the stock market crash (another way to neutralize the crash is to buy Nifty Put Option).

If you follow gold price movements, gold prices hit an all time high during January- February period of 2008. And that was the period when stock market crashed to 14k levels. Gold prices were hovering around Rs 1200 per gram during the same period.

You can buy gold in various forms. But investment in gold is bit different. If you buy physical gold and wear it then it’s not an investment. It should be in your portfolio in some other form so that it is easy to buy and sell just like any other investment. And also by buying physical gold, security issue comes into picture. But if your gold is in paper form then there is no question of security issues.

Reasons for upward movement of gold in the future

1. Since Dollar is crashing countries are looking at gold as a instrument to store value.
2. US sub prime crisis which is prompting investors for alternative investments such as gold.
3. Rising oil prices in turn raises inflation which in turn raises gold price.
4. Limited supply of gold.

How to buy gold

1. Jewelery shop: where you buy gold in physical form. Not advised for investors.
2. Gold futures: bit complexity.
3. Gold ETF: in plain words it means Gold in form of shares. This is advised and I will discus this method in deep.

GOLD ETF (GETF)

ETF means electronic traded fund. GETF are funds maintained by fund houses. The fund house buys physical gold and stores it in their place. So you are not bothered about usual shopping and security. Roughly 1 gram of gold is 1 share of GETF. So if you buy 1 share of GETF from a fund house, the fund house in turn buys 1 gram of gold and store it. You can sell the share whenever you want. So there is no difference between buying GETF shares and a normal share (say an Infosys share).

The GETF shares which you buy is shown in your demat column as normal shares.

GETF share value will roughly reflect the gold price movements since the fund house invests in gold only.

Difference between a normal stock and GETF stock

Since the fund house needs to preserve your gold they charge an expense ratio of 1 % annually and also the tax structure is different from normal tax structure for stocks. (There is a long term capital gain tax of 11.33 %). Even the brokerages are usually same as a normal stock.

List of GETF fund houses

1. UTI GETF
2. Kotak GETF
3. Benchmark Gold BeES
4. Quantum Gold
5. Reliance GETF

The stock value of GETF of the entire above traded fund is more or less same and in turn they are more or less same as actual gold value.

So you can buy 10 shares of UTI GETF in National Stock Exchange through your broker.

That means you have bought 10 grams of gold as investment. It’s as simple as that!!!

(Many women may view this as an unromantic move!!!)

Final Words (Golden words!)

Buying gold as an alternative investment is a world wide phenomenon.

OUTLOOK MONEY advises 5 % of gold in your investment portfolio.

But certainly it’s not as attractive as stock market. Profit out of gold is not highly attractive. Gains are moderated. In stock market you might get 100 % returns within a few weeks which is next to impossible in gold trading. So gold acts as a protection against stock market risk.

SO TIME HAS COME TO VIEW GOLD AS AN INVESTMENT IDEA RATHER THAN FASHION STATEMENT!!!

Happy Investing in GOLD.