Gold is best bought the e-way. Here’s why

This week’s article is based on reader response to one of my earlier articles in DNA (November 23) wherein I had highlighted a product called ‘e-Gold’, launched by the National Spot Exchange Ltd (NSEL). Many readers have sought to know how gold in the electronic form compares with physical gold, or the gold we purchase from jewellers as coins or jewellery.

For those who tuned in late, with products like gold exchange traded funds (Gold ETFs) and e-Gold, it has become very easy to acquire and accumulate gold in small quantities over a period at competitive prices.

The benefits are as follows:
1. Lower cost
Purchase of gold in physical form is relatively costly compared with the electronic form of gold, particularly for smaller quantities.
If you purchase from a jeweller, you pay making charges. Though the jeweller undertakes to buy back the gold jewellery from you, he invariably deducts the making charges, thus effectively reducing your appreciation in gold in case the prices have gone up.

In case you purchase gold bars from a bank, even for small quantities, you pay a premium in the range of 10-15% over the market price of gold. Moreover, banks do not offer to repurchase gold coins and there is no assurance of getting the fair price if you sell the coins outside.

However, the difference between buy and sell quotes of Gold ETF and e-Gold is very small and it eliminates the middlemen’s margins and ensures a good return to the investor.

2. Transparency and uniformity of prices
Since the purchase and sale of Gold ETFs and e-Gold are done at screen-based prices, the prices are the same across the country, thus making it more transparent and uniform as against the prices of gold jewellery which vary from jeweller to jeweller. Even in case of standard products like gold coins, the premium charged by various banks over the prevailing gold prices differs from bank to bank.

3. Convenient to buy and sell
The electronic form of gold, be it Gold ETF or e-Gold, can be purchased from the comfort of your home by making a phone call or through online platforms. However, for buying physical gold, you have to visit either your bank or jeweller. Likewise, it is very easy and convenient to sell the electronic gold in case you need money or want to liquidate your holding.

4. Easy asset allocation and rebalancing
With e-Gold and Gold ETFs, purchasing gold has become easy and convenient, and more people have started allocating some portion of their investment to gold. Investment experts advise an allocation of 10-20% for bullion. As you need to rebalance your portfolio periodically to take the full benefit of the asset allocation concept, effecting this rebalancing of your portfolio is very easy and convenient with paper gold as compared to physical gold.

5. Savings on storage and insurance cost
Since gold is not in your physical custody, you do not have to incur expenses on storage and insurance of gold unlike in case of jewellery where you have to bear locker rent and insurance. Then there are purity concerns with the gold jewellery purchased from a jeweller.

A few readers have expressed concern over the existence of physical gold with mutual funds issuing the Gold ETF or with the NSEL, in case of e-Gold.

Gold ETFs are backed by gold, which is kept with a custodian of repute. The Securities and Exchange Board of India has very recently made it mandatory for the auditors of the Gold ETF schemes to physically verify the gold, which gives a reasonable assurance to the investors that the Gold ETFs are backed by physical gold.

Moreover, in case of e-Gold, the gold is kept with an independent vaulting agency of international repute. The NSEL’s business is regulated by the Forward Markets Commission — a regulatory authority overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Government of India. The physical gold kept with the vaulting agency is periodically audited by the auditors of the NSEL. Like Gold ETF and other securities, record keeping of the ownership of the e-Gold units (ICIN) is done Karvy

Consultants Ltd, which is the R&T (register and transfer agent) for the NSEL. Based on my interaction with the officials at the NSEL and Brinks Arya (the designated vault), I understand that the gold kept with the vault is fully insured. At any given point of time, the e-Gold units are fully backed by an equal quantity of gold kept with its vaulting agency. Thus, this form of gold also gives an assurance to the investors about the existence of physical gold against the units purchased by them. In case of e-Gold, you have the option to convert the units into gold at anytime, which gives additional assurance.

The benefits notwithstanding, my advice on buying gold in electronic format may not go down well with lady readers, as owning a piece of jewellery is a highly satisfying experience for them. But ladies, it’s high time you changed your way of thinking and went for e-Gold or any of the Gold ETFs to derive the next level of satisfaction, so to say.

The writer is CFO, ApnaPaisa.com, a price comparison engine for loans, insurance and investments. He can be reached at balwant.jain@apnapaisa.com