Health Insurance. Motor Insurance. Other Risk Covers. Personal Finance News. Sunil Dhawan. Rate Story. Font Size Abc Small. Abc Medium. Abc Large. Buying gold has traditionally been a financial support system over the years. Gold in the form of jewellery is not only used as wearable but also works as a tool to tide over financial emergencies. So, buying gold has traditionally been a financial support system over the years.
There are ways of owning gold - paper and physical. You can buy it physically in the form of jewellery, coins, and gold bars and for paper gold, you can use gold exchange-traded funds ETFs and sovereign gold bonds SGBs. Then there are gold mutual funds fund of funds which further invest in gold ETFs.
There are gold MFs fund of funds which invest in the shares of international gold mining companies. For buying physical gold, one may reach out to the neighbourhood jewellers. Due to covid, many reputed jewellers have allowed customers to buy gold jewellery online via their websites. Even payment apps such as Paytm, PhonePe, Google Pay etc have tied up with gold jewellers to sell gold coins. Read the now! Indulge in digital reading experience of ET newspaper exactly as it is.
Read Now. ETPrime stories of the day Ed-tech A closed chapter? Subscribe to ETPrime. The gold will not be delivered to you in its physical form but it will be under your name on paper. This significantly adds to the ease and convenience of an investor. The investment is absolutely safe and it is easy to redeem it, as well. Depending on the amount of money you wish to invest, you get allotted investment tool units in case of a Gold Exchange Traded Fund ETF.
One product is equal to one unit of gold. So, you do not have the gold physically but it is stored under your name with the fund house. When the value of the precious metal rises, the value of your fund also increases. Hence, you continue benefitting from the investment without physically owning the gold.
Few ways to invest in gold without buying physical gold There are numerous ways you can invest in gold without buying physical gold. These include:. Best paper gold investments with reduced tax liabilities It is possible to invest in gold without physically buying the same.
Here are some options for you:. These are units which are equivalent to the prevailing market value of gold and can be traded on a commodity exchange. They allow you to diversify the risk and add value to your portfolio. The capital gain tax will be applicable with indexation benefit if sold after three years. If sold within a period of three years, the profit will be liable to tax at the existing income tax slab. You can choose to set up a systematic investment plan and deposit a predetermined amount at regular intervals.
You can get tax benefits of long-term capital gain after holding the investment for twelve months. The paper gold investment has gained popularity amongst investors. Gold bonds : This scheme offers returns to its investors with regard to the change in gold prices.
These bonds are issued by the Reserve Bank of India and come with a sovereign guarantee. There is no tax liability on them, either, except at times when they are redeemed before maturity. Alternatively, you can also invest in a gold saving scheme which will allow you to deposit a fixed amount each month at regular intervals. At the end of the period, you earn a bonus and you can buy gold from the same jeweller at a value equivalent to the amount deposited by you.
Various retailers in the country offer this savings scheme for you. Choose a retailer that offers a bonus at the end of the term so as to allow you to buy jewellery worth a higher value.
Critics point out that these ETFs hold that bullion in a very complex system of custodians and sub-custodians that some people claim is ripe for fraud. And besides, shares in an ETF are still just a line item on a brokerage account statement. The ETF and its custodians would have the gold, but you might have a hard time getting your share of it if the financial system were falling apart. Hold it. Full stop. And why should an investor pay a higher commission for the paper promise of these certificates over the paper promise of an ETF?
But hang on a minute… the ETF is backed by real physical bullion too. Sure, fraud on the part of the ETF or its custodians could sour the deal. But owning physical bullion means really owning physical bullion! It amazes me that investors seldom stop to think about what physical actually means. I met a guy recently who told me he was accumulating allocated physical bullion. I asked him what kind of gold coins he was investing in… Gold Eagles?
Aside from coins, Gold bullion comes in bar form. The bars used in allocated accounts are generally ounces, ounces, or 1 kilogram just over 32 ounces. How can you own 25 ounces of physical gold bullion other than in coins when the smallest popular bar is the ounce kilo bar?
They had promised him he could come collect his physical gold any time he liked, but he never thought to question the impossibility of taking delivery of a partial gold bar. Sadly, stories like this one are not uncommon. So to be clear: Owning physical bullion means that you are the legal owner of one or more physical coins or bars.
In the case of coins, you probably took delivery yourself and have them stored in a safe deposit box. In the case of bars, you may have taken delivery or you may have chosen to have them vaulted by a bullion bank. The exact amount of gold you were able to purchase in bar form was dictated by the available bar sizes. Each bar has a serial number that should have been provided to you, with some sort of paperwork evidencing you as the legal owner of that bar.
Buying physical bullion always involves paying a markup dealer commission above the spot price. He offers free storage too! Those deals are never bona-fide allocated accounts. In other words, you don't actually own anything. The dealer owes you gold and is promising to deliver it when and if you come asking for it. It is not a scam, but rather the way that banks and bank accounts work. It becomes a scam when the bank or depository agent does not fully inform its clients of what they are buying, what they own, and what terms and conditions apply to the asset and its redemption.
It can also become a scam if the entity storing the metal has the audacity to charge you storage fees even though it has not allocated any bullion specifically for you. If you have personal possession of the bullion, the benefit is obvious. But if you are storing bullion in a commercial vault, you need to remember that the benefit of owning physical bullion is that you have no counterparty to your investment.
Really it is, just trust me! This section will briefly review the various physical forms in which you can buy gold and silver bullion, and will discuss the system used to assure authenticity of gold and silver bullion stored in bullion banks. The main purpose of this article is to discuss bullion bars, which offer a more efficient lower costs, charges, or markup way to make a large investment in bullion.
Plenty has been written by authors far more expert than me on the subject of buying gold and silver coins. If your interest is in coins I suggest reading the many excellent articles on the subject you can easily find on the Internet. Enough said on coins. But plenty has been written on these subjects and the primary focus of this article is on bullion in bar form that can be stored in a bullion bank.
If each company that manufactures bullion bars were just to market and sell its products independently, it would be very hard for investors to judge the authenticity of the products sold, or to know which companies are reputable. The solution to this problem is a good delivery standard.
There are several such standards set forth by various industry organizations worldwide. LBMA is a trade association of major banks that engage in the sale and purchase of gold bullion, and in gold trading centered around the London interbank, over the counter market. As the name implies, the organization is headquartered in London, England.
However, the LBMA network of bullion dealers and vaults is global in scale, and is generally regarded as the de-facto worldwide marketplace for sale and storage of gold and silver bullion in bar form. Suppose that you purchase a gold bullion bar from a private-label dealer such as Kitco. To a large extent, you have to rely on the reputation of the seller. Kitco is a widely respected name, but there are many other dealers that are less well known.
For rare coins, this process involves performing chemical and ultrasonic tests to verify that the coins are made of pure gold. For bars, in most cases the test involves melting down and re-manufacturing the bar. The process of verifying purity and authenticity is called assaying, and the practice of melting down and completely re-manufacturing the bar to verify the purity of the gold is called a full-melt assay.
To address this need, the gold market for many decades has used what is known as the London Good Delivery system. The LBMA only came into existence in the late s. Prior to that the banks and dealers active in the London market worked with the Bank of England, which had supervisory authority over the London market, in organizing and agreeing to proceedures.
To participate in the system, a bullion bar must be manufactured by an LBMA-certified and regularly inspected refinery. A system of checks and balances assures that only genuine pure gold or silver bars can get into the system. The bar is generally transferred from the manufacturer directly to an LBMA-certified vault, several of which exist around the world. LBMA vaults are insured, and employ processes designed to make certain that the chain of custody is closely monitored, to prevent bars from being substituted or tampered with.
In most cases, the bar will never leave the LBMA system. If a buyer takes delivery of a bar and removes it from an LBMA recognized depository, when that bars is later re-sold, the purchaser has the right to have the seller pay for an assay to ascertain that the bar has not been tampered with, altered, or adulterated.
The buyer may or may not exercise this right, but always has it. If the bars remain in the custody of the depositories, there is no need to re-assay a bar when it changes hands. Bullion bars that meet the qualifications to be delivered in the London interbank market through this system are known as London Good Delivery bars, meaning that they meet the specifications for London delivery.
The standard good delivery bar is the ounce gold bar or the 1,ounce silver bar. These names are deceptive, however, because in practice the actual weight can be anywhere from to ounces for gold, or to 1, ounces for silver. This is because the physical process for manufacturing bullion bars makes it difficult to create bars that are exactly or 1, ounces. Thus, the good delivery system has a range of tolerance in weight.
Individual bars are sold based on their actual measured weight and purity, as determined by assay. The owner of a bar stored in the LBMA system has the option to take delivery of that bar, but the instant the bar leaves the custody of the LBMA warehouse, it is subject to re-assay on re-sale.
It is possible for the owner of the bar to later re-deposit the bar into the LBMA system, but, as discussed above, they may have to pay to have a full-melt assay performed to re-verify its exact weight, purity, and authenticity. In other words, you can take a manufactured bar out of the LBMA system, but you might face a significant charge and time delay to put one back in.
This allows the market to avoid having to re-assay bars every time they are sold to verify their authenticity. What does all this mean to the investor? Basically it means that you have two choices when buying Gold Bullion in bar form:.
Other parts of the market operate in the same way. There are depositories that are recognized by the dealer market as being trustworthy depositories. If metal is held in those vaults and does not have the physical appearance that it has been adulterated or altered, or in some other way may not be real, the metal can change hands repeatedly over many years without being re-inspected and assayed. The choice as to whether to leave the metal in a recognized depository or take actual physical delivery really comes down to whether you intend to take delivery of your bullion personally and store it in a safe deposit box, or have it stored for you by a bullion bank.
In my opinion, for large investments, the Good Delivery system is the way to go. In a serious economic crisis, the bad guys will come and kill you and your family to get your gold. The LBMA system is the best-known, but there are other good delivery standards around the world. The New York market uses the Comex system of good delivery metal. This includes ounce gold and 1,ounce silver bars from Comex-registered refineries. Comex has a network of depositories it has registered as being good for delivery of metal to Comex against its futures contracts.
Metal that meets the Comex depository and good delivery standards can remain in that system for many years, changing hands repeatedly. As with the London market, the metal can be taken out of the system, but the owner then is liable for re-assaying if the metal is resold. The Zurich market uses a slight variation of the London good delivery standards. The LBMA website lists 17 different sizes of exact-weight bars.
However, the common sizes that bullion banks are likely to offer in conjunction with allocated storage accounts will generally be limited to the most commonly traded sizes:. The LBMA defines two categories of bullion accounts. By far the most common type is the unallocated account. This is a farce; an unallocated account is basically a paper promise that is not really backed by physical gold bullion.
Rather, the bullion bank owes you bullion. The bank probably has enough bullion on hand although they are not required to if you wanted to take physical delivery of your metal. But they are allowed to fractionalize their bullion holdings. In other words, they are not required to actually have all the gold needed to back all the deposits of all the customers. They keep enough gold to satisfy whatever redemption demand they think is likely.
In my opinion, the GLD ETF represents a far more sound investment than an unallocated bullion bank account, although neither will help you in a true crisis where an allocated account will. There are some gold ETFs that do not use physical gold backing, but these are few and small. Critics have argued that some of the ETF custodians could be leasing out some of the gold owned by the ETF, and thus there might be multiple ownership claims on the same bullion.
There is no evidence that any of the major ETFs offered by money center financial institutions do this. The criticism is limited to speculation by others — usually people with a vested interest in discrediting the ETFs — that such shenanigans could be going on. Again, there is absolutely no evidence that this in fact is the case.
Frankly, I think these allegations amount to fear mongering on the part of critics who have a financial incentive to scare investors away from the ETFs in favor of other products being sold by those same critics or their associates. Could other parties also have a claim on that same gold?
This language is pretty clear in saying that liens, security interests, claims, options, etc. Clear, unencumbered title to the gold must be transferred to the trust when an Authorized Participant creates new GLD shares. However, the gold holdings of the ETFs are audited by independent auditors regularly, at least annually. Could the auditors be fooled and miss something? That would not be unheard of. But I know for certain that the bullion banks definitely do not have all the gold needed to back all their unallocated accounts in physical form.
The LBMA website is very clear follow this link to see for yourself that the owner of an unallocated account does not own bullion. Rather, they are an unsecured creditor of the bullion bank, which owes them bullion. Then they end up being sold unallocated accounts, and the bullion they have paid for is leased out to the very same short sellers who are alleged to perpetrate the market manipulations!
And to top it all off, some of the most prominent and reputable banks in the world are charging storage fees to clients who own these unallocated accounts. In my opinion, unallocated bullion bank accounts are not a good deal for the individual investor. They own paper promises. If you bought ounces and there was no need to match your desired investment size to the exact size of available bars, you were probably sold an unallocated account.
The way to tell for sure is simply to ask your bank or broker to provide you with the serial number s of your bar s. If they are not willing to do so, you almost certainly have an unallocated account. And unless there is fraud or corruption going on, the ETF actually owns all the gold. The bullion banks only own some of the gold because unallocated accounts are fractionalized.
Allocated Accounts are those in which the investor actually holds legal title to the bullion in question. Aside from storing the bullion yourself in a safe deposit box, an allocated account is the only way to own physical bullion. You have to tell the bank or broker approximately how much metal you want to buy, and they will match your order up with the available inventory of bullion bars.
You will be provided with the unique serial number, gross weight, purity and fine weight of each bar you purchase. The fees are considerably higher as a result. Sound like a lot of fees? There are three subcategories of paper gold:. The big question is whether or not a given investment vehicle really falls into this category. Furthermore, they must refrain from leasing this gold out to third parties or otherwise creating a situation where there might be more than one ownership claim, or encumbrance in legal terms, on a single piece of bullion.
If those conditions are met, the next question is whether the company running the show engages in other businesses. If they are a large bank, in a bankruptcy the bullion clients might end up fighting with the other creditors of the bank over the gold.
Several critics have argued that the GLD ETF does not fall in this category because there may be multiple ownership claims on the gold it owns. A popular allegation is that the authorized participants may be leasing gold from central banks, then depositing that leased gold which is really still owned by the central bank to create GLD shares.
Obviously, fraud could exist in any situation, but the commonly touted allegation that GLD does not require the Authorized Participants who create shares to actually own the gold appears to me to be incorrect. Whitepaper Viktor Prokopenya Capital.
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Rate this article. You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again. CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position.
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The paper gold investment has gained popularity amongst investors. Gold bonds: This scheme offers returns to its investors with regard to the change in gold. Indeed, paper gold has several advantages that might make it look attractive for some investors. Here they are: Liquidity: generally, gold ETF. Just remember, like gold stocks you aren't buying gold, just paper that is theoretically backed by debt or equity of mining companies or futures.