AN EMPIRICAL STUDY ON GOLD INVESTMENT RAGE AMONG THE PROFESSIONALS - A COMPARATIVE ANALYSIS OF GOLD ETF, EGOLD AND GOLD FUNDS

Transcription

1 AN EMPIRICAL STUDY ON GOLD INVESTMENT RAGE AMONG THE PROFESSIONALS - A COMPARATIVE ANALYSIS OF GOLD ETF, EGOLD AND GOLD FUNDS Jalpa Thakkar Assistant Professor, ASM s IPS Sheenam Gogia Assistant Professor, ASM s IPS Vatsala Manjunathan Assistant Professor, ASM s IPS ABSTRACT Gold is the oldest precious metal and it has been valued as a global currency, a commodity, an investment and also a symbol of beauty. For centuries, gold has remained an auspicious gift, a heritage value, whether it's for a new born baby or for a newly married couple. Gold gets passed down generations and has proved to be a good investment over decades. India is world's largest consumer of gold. It is required is to address the larger issue that is to encourage the substitution of gold purchases with alternate investment options available in the financial market which helps in increasing the productive capacity of the Indian economy. We in our study have tried to throw light on the different avenues of gold investment available in the market. We have also tried to find out the awareness and attitude towards the alternative methods of gold investments among the selected investors in the Pune region. The research highlights the need for encouraging investment in new gold alternatives. This will ensure that gold becomes tradable and generates revenue rather than lying idle as a dead investment. KEY WORDS: E-Gold, Gold ETF, Gold Funds, Gold Investment, Return and Risk. INTRODUCTION Investors across the world buy gold as an investment. The demand for gold has risen over the last few years. It is mainly safe and sound form of Investment from the point of view of large global investors who aim at protecting their investments in the current global economic uncertainty. A growing range of methods now allows investors to either buy gold, or simply gain exposure to gold price movements. From gold coins, online accounts, exchange traded funds and complex financial products, to mining stocks, the most appropriate gold investments will depend upon the investor s specific requirements and outlook. (World Gold Council) WAYS OF INVESTING IN GOLD 1. Coins and bars 1

2 2. Futures and options 3. Gold Accumulation Plans (GAP) 4. Exchange Traded Funds (ETFs) 5. Gold funds 6. E- Gold 1. GOLD BARS For the serious and large scale investor, gold bars are a simple and efficient way to invest in gold. The larger bars are usually available at the lowest premiums over their intrinsic gold value; smaller bars tend to cost more. There is a trade-off however, in that larger bars are not as flexible when it comes to selling. If you own a kilo bar, and you wish to sell, say 100 grams, it's not easy to slice off one end of your bar. Your choice of buyer is also more restricted as you will need to sell to a larger dealer; it is unlikely that you will find a private buyer as most people are not familiar with gold bullion bars. GOLD COINS It is sensible to purchase one ounce gold bullion coins, guaranteed by a government Gold coins are mass produced; they are available at very competitive prices compared with similar size bars. Gold coins are almost universally recognized, they are also easy to resell. 2. GOLD FUTURES Gold futures contracts are binding commitments to make or take delivery of a specified quantity and purity of gold, on a prescribed date, at an agreed price. The initial margin - or cash deposit paid to the broker - is only a fraction of the price of the gold underlying the contract. That means investors can significantly leverage their investment. This can yield significant trading profits, and it can also cause equally significant losses in the event of an adverse movement in the gold price. The gold futures price is usually higher than the gold spot price. GOLD OPTIONS These give the holder the right, but not the obligation, to buy ('call' option) or sell ('put' option) a specified quantity of gold, at a predetermined price, by an agreed date. The cost of such an option depends on a number of factors, including the current spot price of gold, interest rates, anticipated or implied volatility, time to expiry, and of course the pre-agreed or 'strike price'. A higher strike price will attract a less expensive call option and a more expensive put option. Conveniently, where the strike price is not achieved, there is no obligation to exercise the option. That means the holder's loss is limited only to the premium paid for the option. Like shares, both futures and options can be traded through brokers. 3. GOLD ACCUMULATION PLANS 2

3 Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based on the principle of putting aside a fixed sum of money every month. The fixed sum then buys gold every trading day in that month. The fixed monthly sums can be small. Because small amounts of gold are bought over a long period of time, exposure to short term variations in price is contained. At any time during the contract term (usually a minimum of a year), or when the account is closed, investors can get their gold in the form of bullion bars or coins, and sometimes even in the form of jewellery. Should they choose to sell their gold they can also get cash. 4. EXCHANGE TRADED FUNDS (ETFS) Buying Gold ETF is purchasing gold in electronic form. You buy them just like you buy stock of any company from your broker. Gold ETF makes it easier for you to invest in gold. The investment objective of Gold ETFs is to provide you with returns that closely correspond with the domestic price of real gold. Each Gold ETF unit that you buy is roughly equal to the price of 1 gm of gold. They are easy to buy since you can even buy just one gram at a time. Over time, you can build up your gold portfolio to the level you want, just as you would with your bank or jeweler, only this is easier. GOLD ETF BENEFITS No Premium or making charges You end up paying a premium for gold coins & bars purchased from banks and jewelers charge extra as making charges. With GOLD ETF, you don't have to pay any premium, making or delivery charges. Yet whenever needed you can also exchange them in multiples of 1kg units for purity No worries of theft You always worry about the safety of your gold and also end up paying for bank lockers. Buying Gold ETF is purchasing gold in electronic form. You buy them just like you buy stock of any company from your broker. With Gold ETF, since your gold is now in demat form there are no worries of theft and you also save on locker charges. Easy to sell Unlike gold coins and bars, which the banks don't buy back and most jewelers only offer to exchange but not buy back. Gold ETFs can be sold anytime through your broker at transparent prices available for view at NSE's website. And unlike other forms of gold, you get the same price for your Gold ETF across India. On Gold ETF, you pay no sales tax, securities transaction tax, and VAT or wealth tax. 3

4 5. GOLD FUNDS Gold fund of funds is a solution meant for investors who wish to invest in gold but do not have a demat account. It aims to generate returns by investing in units of gold ETF. It works like any other open-ended mutual fund scheme. There could be different options of investment like minimum investment being set at Rs. 5,000 for onetime investors. There could also be an option to enrol for SIP and STP with a minimum commitment of six instalments of Rs. 1,000 each. One can invest in a disciplined manner the way one is comfortable. Also there is no fixed denomination of gold that needs to be purchased. The investor would invest in the scheme and the fund manager in turn will buy the units of gold ETF. The fund manager takes the responsibility of transactions on behalf of the investor. 6. E-GOLD The National Spot Exchange Limited (NSEL) has introduced E-series products in commodities. To start with, they have launched E-Gold and E-Silver. Trading in E-Gold has been on since 17th March E-Gold units can be bought and sold through the exchange (NSEL) just like shares. One unit of e-gold is equal to 1 gram of gold. For long term goals like accumulating gold for children s marriage, retail investors can buy e-gold in small quantities in their demat account over a period of time. Once their target is achieved, the individual can take physical delivery of gold through the exchange. By buying gold in electronic form (demat), the individual need not worry about the purity of gold, storage costs and the insurance of gold. If the individual has bought e-gold only for investment purpose and does not need to take delivery of physical gold, then he can always sell the e-gold units and encash them. REQUIREMENTS FOR E-GOLD To buy E-Gold units, the individual needs to open a demat account (beneficiary account) with one of the empanelled Depository Participants (DP). Retail individual can place buy and sell orders for e-gold units with their broker through phone or through the internet (broker s website). Investing in E-Gold or other metals opens up one more asset class for retail individuals to diversify their investment portfolio. It provides a means to buy, accumulate and sell E-Gold as well as to convert the same into physical gold. E-GOLD Vs ETF 4

5 The biggest advantage that investing in e-gold has over gold ETF is that it involves no management costs or other recurring expenses. So the product is a lot more cost-effective for people who have a long investment horizon. The only charges involved are a one-time transaction fee of 2-3 paisa per gram and a brokerage fee of %. Both these charges are also levied in case of gold ETFs, but are much higher. E-gold can be converted into physical gold for quantities as small as 8 gm, while gold ETFs offer the option of physical delivery but only for a denomination of over a kilogram. Accumulating such a huge amount of gold is not feasible for small investors. The delivery centres of the National Spot Exchange are located in 15 cities, while ETFs have only one delivery centre in Mumbai. E-gold can also be directly converted into jewellery through select, reputed jewellers that conform to the purity and transparency guidelines. The investor only has to pay for the making charges. The National Spot Exchange aims to bring all branded jewellers under its umbrella of empanelled jewellers within a year. The liquidity in e-gold is also increasing phenomenally, with the current average daily turnover being Rs crore compared with Rs crore in case of gold ETFs. Liquidity is of utmost importance for a retail investor as it makes buying and selling more efficient by reducing the impact cost (which is the bid-ask spread). The impact cost for e-gold is only paise, as opposed to Rs 4-5 in gold ETFs. E-gold wins hands down against gold ETF. For the typical Indian investor, e-gold is more suitable as it provides the option of delivering the yellow metal and, hence, bridges the gap between using it for investment and the traditional, auspicious reasons for buying it. Unlike in gold ETFs, where prices are measured in terms of the net asset value, it is simple to understand e-gold because of the transparency in pricing. A small investor, who wants to accumulate gold for his daughter's wedding or a festival, can easily do so through planned, monthly or weekly investment in e-gold. In this manner, he can also guard his investment against price volatility. E-gold has also been providing better returns than gold ETFs. The primary reason for the differential is that in the case of investing in gold ETFs, there is a range of charges, such as management and advisory fees, marketing and distribution expenses, custodian charges and other operational expenses. The expense ratio of gold ETFs is around 1%. Apart from the charges, tracking error also brings down the returns of gold ETF's a little bit. LITERATURE REVIEW The prices of precious metals have risen fairly high and have yielded better returns than any other instruments over the last few years. Analysts say that the position for precious metals is still attractive in the medium term due to uncertainty in the global economies, and more expectations of monetary slackening across the world. Investors can include precious metals to their portfolios vigilantly by buying in small quantities from time to time. (World Gold Council) 5

6 High liquidity and flexible monetary policies of central banks across the world, to boost economic activity, further resulted in more investments in Gold, leading to higher prices of gold. The long-term benefit of Gold is its ability to stabilize a portfolio and protect it against market fluctuations. Historically, gold prices have shown better stability even during periods of crisis, as compared to other investment avenues. Most experts advise investing in gold as a "must", since gold creates a robust portfolio that withstands market fluctuations. India s domestic production of gold is very limited; the rising demand has to be sourced from outside the country. Moreover, Gold as a commodity on its own does not add much to the productive capacity of the economy as when one buys gold, it either is stored in lockers or gets converted into jewellery. In both the cases, money spent on purchasing gold gets blocked. (Assocham, 2011) As per a consumer demand report (World Gold Council) the consumer demand figures in selected countries suggests: India accounts for nearly one-third of the total world demand for gold i.e tonnes. Indian consumer demand for gold is 37.6 per cent more than that of China (769.7 tonnes). Another major economy of the world USA reported at tonnes. Moreover if we look at the demand for gold alongside the size of these major economies we see that: India s GDP is no where closer to that of China and USA. In terms of percentage share India s GDP is 27.7 percent of China and a meager 11.0 percent of USA. (UNCTAD, RBI) Thus looking at the pattern of gold consumption in India it seems that creating awareness about the different gold investment avenues and trading in such avenues can help in bringing down the demand of physical gold. RESEARCH METHODOLOGY The above theoretical research about the current gold investment rage leaded to the need of finding out more specifically about the investor s attitude and beliefs in order to reach the goal of the research. Empirical research finds out the current knowledge and awareness towards different gold investment of the professionals. Questions in empirical research directed towards finding out investor s behavior and therefore does not seek to find out specifically what investments any respondent has or has had, but how he or she acts in the investment process. OBJECTIVES OF THE STUDY 1. To know about the most preferred metal for Investment from Gold, Silver and Platinum 2. To know the attitude towards Investment in Gold and other Gold options. 3. To know about the information sources used in making Gold Investment. 6

7 4. To know about the role that different information sources play in Gold Investment decision. 5. To know about the influence of different aspects while investing in gold. 6. To know about the risk opinion in physical gold and other gold investment options 7. To know about the attitude towards risk, return and liquidity in Gold ETF, E-Gold and Gold funds. DATA COLLECTION In order to reach the objectives, empirical research was conducted using online questionnaires. The survey was conducted among 100 investors in the Pune region. All the questions were closed ended with most of them with multiple choices. None of the questions were compulsory for the respondents. DATA ANALYSIS 1. Gender Male 72 Female Most Preferred Investment option among the 3 precious Metals Gold 72 Silver 16 Platinum Willingness of Respondents to Invest in Gold Yes 88 No Most preferred way of Investing in Gold Physical Gold 34 Coins/Bars 25 E-Gold 15 Gold ETF 15 Gold Funds Main objective for making investment in Gold rather than any other form of Investment 7

8 More Secure 46 More value than other financial instruments 49 Not affected by Market Phase 24 Heritage Value 25 Bullish Trend in Gold prices Most Preferred way of searching Information for Investment in Gold Friends and Family 43 Follow the market and analyze 58 Search for the company that offers gold investment, study their product information, ads etc. 29 Gather information from literature and media 31 Take advice from investment brokers/experts 29 Others Ratings of different Information sources in gold Investment decision Do not consider Consider a Little Consider a Lot Response Count Family and friends Investment Brokers Journalism/Media Others Aspects that influence the decision while investing in Gold Negative influence No influence Positive Influence Investment is very popular Price of the investment has recently increased Availability of information Previous personal experience with investing Response Count 9. Risk opinion on the below two aspects of Gold options 8

9 Physical gold which stays in your house is stolen 60 Valuables which are in the bank or investment company will demolish because of their wrong decisions Ratings of Gold Investment options on Risk, Return and Liquidity Risk Very High High Moderate E-Gold 11.1% (11) 25.3% (25) 45.5% (45) Gold Fund 7.1% (7) 29.6% (29) 51.0% (50) Gold ETF 3.1% (3) 16.7% (16) 54.2% (52) Return Very High High Moderate E-Gold 12.1% (12) 41.4% (41) 43.4% (43) Gold Fund 8.2% (8) 39.2% (38) 48.5% (47) Gold ETF 9.4% (9) 37.5% (36) 49.0% (47) Liquidity Very High High Moderate E-Gold 24.2% (24) 37.4% (37) 31.3% (31) Gold Fund 18.4% (18) 36.7% (36) 35.7% (35) Gold ETF 17.7% (17) 34.4% (33) 39.6% (38) FINDINGS 1. Gold is the most preferred metal as compared to silver and platinum. 2. Among the different Gold Investment options, physical gold is mostly preferred by the respondents secondly by Gold coins/bars and then Gold ETF and E-Gold. 3. Most respondents are willing to make investment in gold because it is more valuable than other financial instruments and comparatively more secure. 4. Respondents mainly follow the market and analyze while searching for information for investment in Gold options. Secondly, they also take advice from friends and family members 5. Family members and friends play a key role in the investment decision of the respondents followed by journals, media and magazines/newspapers. 6. Previous personal experiences with investment in gold and good returns mainly influence the decision to invest in gold. 9

10 7. Respondents are of the opinion that Physical gold which stays in house is more risky than the Valuables which are in the bank or investment company 8. From the risk and return perspective Gold ETF is considered to be moderate in the ratings as compared to E-Gold and Gold Funds and from the Liquidity perspective, E-Gold is considered to be highly liquid as compared to Gold ETF and Gold Funds. CONCLUSION The research gives better understanding of investor s attitude and awareness regarding gold investment decisions and shows where currently physical gold s position among the other gold investment instruments is. Investors go through a information search and market analysis before making the gold investment decision. Research showed that gold is already known and valued by the people for its return and long tradition and all the respondents mostly have investment in gold or plan to buy more gold. Research also throws light on the lack of awareness about the new trends in gold investment alternatives i.e. Gold ETF, E-Gold and Gold Funds. As India imports most of its gold requirement, high value of gold imports has now started hurting India s current account position. Thus government should encourage means of alternate gold investment. As per a World Gold Council Report5 India has one of the highest saving rates in the world; estimated at around 30 percent of total income, of which 10 percent is invested in gold. Therefore it is important that the financial sector taps into this huge saving reserve in new investment avenues. REFERENCES 1. About Gold-ETF. nsegold.com 2. "Demand and supply". World Gold Council.gold.org 3. "Exchange-Traded Funds (ETFs)". Retrieved nsegold.com 4. E-gold v/s Gold ETF. Retrieved April 23, myfamilyinvestment.com 5. Gold: A commodity like no other, World Gold Council. Gold.org 6. Gold Demand Trends Third Quarter 2011, World Gold Council. Gold.org 7. "Howstuffworks "All the gold in the world". Retrieved Money.howstuffworks.com 8. Indias_Gold_Rush_Its_Impact_and_Sustainability. assocham.org 9. Investments (7th Ed) by Bodie, Kane and Marcus,2009, P Jeff Opdyke ( ). "Rethinking Gold: What if It Isn't a Commodity After All?". The Wall Street Journal. 11. Nathan Lewis (26 June 2009), "Where's the gold?", The Huffington Post 12. Story of gold.gold.org 13. "Supply and demand statistics /World Gold Council, gold market research, reserve asset and investment statistics". Retrieved Gold.org. 14. "The Industry Handbook: Precious Metals" Investopedia. 15. Why invest in gold. nsegold.com 16. "World Gold Council-value-market intelligence-supply & demand/recycled gold". Retrieved gold.org. 10