How to invest in gold without holding it

Market Commentary 17 Aug 2017

How to Invest in gold without holding and storing physical gold?

Today, there are all sorts of innovative alternatives to physical presence. Learning a new language, buying your next great outfit, speaking to colleagues or friends living millions of miles away- it can all be done in a few clicks, without ever leaving the comfort of your home. Even when it comes to financial matters, we often make investment purchases without holding the asset physically.

Take the example of a mutual fund. You invest in thousands of assets indirectly through a fund. But what you hold is an ‘electronic receipt’ of ownership. The same goes for stock market investments. You buy shares but rarely hold the physical certificates.

In the same manner, you can invest in gold without having to go out and buy physical gold and store it with yourself.

Traditional way of buying gold – Physical gold

To buy gold, you head to the jeweller or bank. You weigh the gold, check its quality, look for agold hallmark and gold karatage, and then pay for it. In such cases, you purchase gold worth at least a few thousand rupees. After all, even the lightest gold coin weighs 1 gram, which can cost nearly Rs 3,000 . Gold jewellery, meanwhile, is likely to weigh a lot more.

Important factors to consider while buying physical gold:

Quantity of gold: What if you want to buy gold worth Rs 500 or Rs 1,000? You cannot keep collecting gold worth Rs 500 or Rs 1,000 month on month.

Security: Gold is a coveted precious metal. So, safety is high priority when buying gold jewellery or coins.

Gold pricing: Suppose, you hold a piece of gold jewellery weighing 30 grams. It’s worth Rs 90,000 . You pay an additional Rs 1,000 as making charges. Due to an emergency, you decide to sell the gold jewellery. However, you only end up getting Rs 90,000, thus losing out on the making charges. Moreover, it would be difficult to sell part of your gold jewellery to get a smaller sum. Instead, you may consider mortgaging the gold. In such a case, the price at which you buy back the gold may be different from the sale price.

Related: 5 Things to know before you sell your gold

Purity: When you buy gold, you must look for these 4 signs of the certified BIS Hallmark. This assures that the quality of gold you bought has been verified. Otherwise, it’s easy to mix gold with other non-precious metals or alloys. This reduces the worth of your gold investment. The Hallmark, however, assures that the gold has been tested and certified.

Related: How is gold hallmarking done?

What if you could invest in gold without having to consider any of the above factors?

Here are few ways to invest in gold without buying physical gold

  • Gold funds and exchange-traded funds (ETFs)
  • Gold derivatives
  • E-gold
  • Gold receipts

How to invest in gold without physically buying it?

Let’s suppose you and your friend head to a jeweller and buy gold coins weighing 5 grams each. You, however, travel to another city for a month. So, you request your friend to store your gold coin too. But this does not mean your friend owns the coin. You hold the bill that mentions your name as the owner. So, while you travel, all you have is a piece of paper that names you as the owner. All this while, though, the gold is not with you physically.

Something similar happens when you invest in products that are backed by gold. A gold fund or Exchange-traded Fund (ETF) pools money from thousands of investors like you. They then buy gold bullion on your behalf. Depending on how much money you have invested, you get allotted investment tool units. Each product unit is equivalent to a unit of gold in grams. Every ETF unit you hold is thus ‘backed by gold’. So, while you do not have the gold with you physically, it’s stored on your behalf by the Fund house.

Even the value of your investment is linked to gold. So, every time the price of gold increases, the value of your gold Fund or ETF holding rises too. This way, you continue to benefit from gold without physically owning the gold.

Related: How is gold price determined?
Related: Know more about Gold Backed Exchange Traded Fund
The bottom line

It’s a new world with new ways of investing in gold. These gold-backed investment options can make life a lot easier for you, allowing you to benefit from the reliable economic value of gold. The cost of investing in such options too is low and is often very convenient.

Sources:

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Gold Glossary

Pauji

It is a type of traditional jewellery from Uttarakhand and is basically a gold bracelet worn by the women.

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