Commodity Trading Basics
by 5paisa Research Team Last Updated: 2023-04-25T15:26:18+05:30
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Introduction

Gold has long been regarded as a symbol of wealth and prosperity, offering investors a reliable store of value in times of economic uncertainty. As one of the oldest forms of investment, gold continues to be a popular choice for those looking to diversify their portfolios and protect their assets from inflation and currency fluctuations.  This article discusses the different ways of investing in gold, the documents required, and the risks involved.

How to Invest in Gold?

Gold as an investment can be done in various ways, depending on your preferences and risk tolerance. From buying physical gold in the form of jewellery, coins, bullions, or artefacts, to modern forms of investment like gold ETFs and gold funds, there are various options available for investors. However, with changing times, investors have started to explore newer avenues of gold investments, which are more convenient and offer better returns. Here are several ways you can invest in gold: 

Type of Gold Investment

Explanation

Pros

Cons

Physical Gold

Investing in physical gold, such as gold coins or bars.

Tangible assets that can be stored securely.

Incurs additional costs such as making charges and storage fees.

Gold ETFs

Investing in Exchange-Traded Funds (ETFs) that track the price of gold.

Easy to trade like stocks, low expense ratios.

Market fluctuations can lead to losses.

Gold Mutual Funds

Investing in mutual funds that invest in companies engaged in gold mining or production.

Diversified portfolio, managed by professionals.

Can be affected by company-specific risks.

Gold Sovereign Bonds

Investing in sovereign bonds issued by the government, which pay interest and are redeemable in gold.

Government-backed, provides fixed interest.

Liquidity can be a challenge, market fluctuations can lead to losses.

Gold Futures

Trading in gold futures contracts, which are agreements to buy or sell gold at a fixed price at a future date.

High leverage potential, allows for short selling.

High risks and volatility, requires expertise and knowledge of the market.

 

While physical gold has its own charm and allure, modern forms of gold investments like ETFs and funds offer more convenience and flexibility. Ultimately, the key to successful gold investment lies in understanding the market and choosing the right investment option that aligns with your investment goals.

What Documents are needed to Invest in Gold?

Gold as an investment requires different documentation depending on the method chosen. For physical gold, you will typically need to provide:

    Identification proof: Government Issued ids such as Aadhar Card, PAN Card or passport for verifying your identity.
●    Address proof: A utility bill, bank statement, or rental agreement to confirm your residence.

For gold ETFs, gold mutual funds, and gold derivatives, you will need to have a trading and Demat account with a stockbroker. The documentation required may include:

●    Know Your Customer (KYC) form: A form to provide personal and financial information for verification purposes.
●    PAN card: A unique identification number issued by the Income Tax Department of India.
●    Bank account details: For transferring funds and receiving dividends or redemptions.
 

What are Different Ways of Owning Gold?

There are several ways of owning gold, each with its own advantages and disadvantages:

●    Physical gold: Owning gold in the form of coins, bars, or jewellery allows you to possess tangible assets. However, it involves storage and insurance costs.

●    Gold ETFs: These funds offer exposure to gold prices and are easy to trade on stock exchanges. They have lower storage and insurance costs compared to physical gold but may have management fees.

●    Gold Mutual Funds: These funds invest in a diversified portfolio of gold-related assets and provide professional management. They may have higher fees compared to ETFs but offer the potential for higher returns.

●    Gold derivatives: Futures and options contracts allow investors to leverage their investment and potentially generate higher returns. However, they come with higher risks and may require advanced knowledge of financial markets.

●    Gold mining stocks: Gold as an investment in mining stocks involves buying stocks of companies that are involved in gold mining or exploration. The performance of these stocks is dependent on the performance of the company and the price of gold.

 

Invest in Gold ETFs and Gold Mutual Funds

Investing in gold ETFs and gold mutual funds is a popular way to invest in gold without physically owning it. Gold ETFs (Exchange Traded Funds) are securities that are listed on stock exchanges and are backed by physical gold. Gold mutual funds are funds that invest in gold ETFs, gold mining companies, or other gold-related investments.

If you’d like to invest in gold ETFs or gold mutual funds, you need to have a demat account and a trading account with a stockbroker. Once you have the account, you can buy or sell gold ETFs or gold mutual funds on stock exchanges like any other stock. Investing in gold ETFs and gold mutual funds offers several advantages, such as liquidity, transparency, and ease of trading. However, there are also risks associated with these investments, such as market risk and expense ratio.
 

How can I invest in gold without physically holding it?

There are several ways of obtaining gold as an investment without physically holding it, including:

1.    Gold Exchange Traded Funds (ETFs): These are exchange-traded funds that track the price of gold and can be traded on stock exchanges.

2.    Gold Mutual Funds: These are mutual funds that invest in companies engaged in gold mining, refining, or distribution.

3.    Gold Futures: Investors can buy or sell gold at a pre-decided price and date in the future using contracts known as futures.

4.    Gold Options: These are contracts that give investors the right, but not the obligation, to buy or sell gold at a predetermined price and date in the future.

5.    Gold Mining Stocks: These are shares in companies engaged in gold mining and exploration. 

6.    Gold Savings Schemes: Some banks and jewellers offer gold savings schemes where investors can make regular investments in gold and accumulate it over some time.

7.    Digital Gold: Digital gold is a new and innovative way to invest in gold. It is a form of gold investment that allows investors to buy and sell gold digitally in small denominations.

It's important to do your research and consider the risks involved before considering gold as an investment option. It's also a good idea to consult with a financial advisor to determine which option is best suited to your investment goals and risk tolerance.
 

Risks of investing in gold

Gold as an investment carries certain risks, including:
1.    Volatility: Like any other asset, the price of gold is subject to market fluctuations and can be highly volatile. This means that the value of your investment in gold can fluctuate rapidly and unpredictably.

2.    Inflation: Although gold is often considered a hedge against inflation, its value can be negatively affected by high inflation rates if they cause interest rates to rise and the economy to slow down.

3.    Currency fluctuations: The value of gold is typically denominated in US dollars, so changes in the exchange rate between the dollar and your local currency can affect the value of your investment.

4.    Market risks: Gold prices can be influenced by a wide range of factors, including geopolitical events, economic data, and market sentiment. These risks can cause sudden and unexpected price movements that can impact the value of your investment.

5.    Storage costs: If you choose to invest in physical gold, you will need to pay for storage and insurance to keep it safe, which can add to the overall cost of your investment.

6.    Liquidity risk: While gold is a highly liquid asset, selling your investment quickly may be challenging during times of market stress or low demand.
 

Conclusion

Gold as an investment can be done in various ways, depending on one's preferences and risk tolerance. Physical gold, gold ETFs, gold mutual funds, sovereign gold bonds, gold accumulation plans, and gold derivatives are some of the common methods of investing in gold. 

Before investing, it is crucial to understand the risks and rewards associated with each investment method and consult with a financial advisor to determine the best approach. The documentation required for investing in gold may vary based on the chosen method

Gold as an investment provides tangible assets, but it involves storage and insurance costs. On the other hand, gold ETFs, gold mutual funds, and digital gold provide ease of trading and liquidity, but they come with risks such as market risk and expense ratio. Therefore, investors should evaluate their investment goals and risk appetite before investing in gold.

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Frequently Asked Questions

Gold has traditionally been a popular investment in India and is considered a safe-haven asset, especially during times of economic uncertainty. However, whether or not a gold investment in India is profitable depends on various factors such as the purchase price, the holding period, and the prevailing market conditions.

Gold as an investment can help diversify your portfolio because it has a low correlation with other asset classes such as stocks and bonds. This means that gold prices may move independently of other investments, which can help reduce overall portfolio risk. 

The prices of gold in India are influenced by several factors, including global demand and supply, economic and political conditions, and currency fluctuations. A decrease in the value of the Indian rupee against the US dollar can lead to higher gold prices, as gold is traded in US dollars globally. Other factors that impact gold prices include interest rates, inflation, and government policies related to gold imports and exports.

The current gold import duty in India is 12.5%, and with the addition of agriculture infrastructure development cess and other taxes, the effective duty on gold stands at 18.45%.

As of April 2023, the price of 10g of 24k gold (99.9%) in Delhi, India is Rs 61,630. Keep in mind that gold rates can fluctuate frequently due to market conditions, so it is always advisable to verify the prices from multiple sources before making any investment decisions. 

The interest rate on a gold loan in India varies depending on the lender and other factors such as loan amount and loan tenure. However, the interest rates on gold loans in India range from 7% to 29% per annum. It is advisable to compare the interest rates offered by various lenders before choosing one.

The amount of money you should invest in gold in India depends on your financial goals, risk appetite, and overall investment portfolio. Financial experts typically recommend that gold investments should not make up more than 10-15% of one's overall portfolio. 

Gold as an investment in India can be a good option for diversifying one's portfolio and as a hedge against inflation and economic uncertainties. It is important to carefully evaluate the risks and rewards associated with gold investments and consult with a financial advisor before making any investment decisions