All about Gold

This is not a rant about how Gold should be at the center of the monetary universe, or how hard money is what counts, or how it is just a pretty rock. This is a post only for those who wish to invest in gold in India rather than debate about its utility. So, only if you’re convinced about the utility of gold in your portfolio, should you read ahead. Else, adieu. For TLDR, watch the video below:

Gold in India can be bought by 4 means:
1. Physical
2. Via ETFs
3. Via Sovereign Gold Bonds
4. Via Digital ownership
5. Via Derivatives (gold futures and options): This isn’t really investing in gold, rather playing on its price. Not trying to get into the trade vs invest debate. Everyone should know that any investment is basically a trade. What matters is the duration. Derivatives are by far the shortest duration trade that you mandatorily have to close (even if to roll over). Plus there are far too many nuances of derivative exposure that make the article so extensive as to make it redundant for readability. Hence, excepting this topic.

There are many considerations that should play into your decision to buy gold via any medium:
1. Whether it is a short term trade or a long term investment that you wish to leave to your kids.
2. Whether it is about profit from that trade, or about wealth preservation/liquidity for rebalancing.
3. Whether you are comfortable holding a pretty rock which pays no interest,
4. Whether you are comfortable with counterparty risk.
5. Security concerns of keeping gold in your home/bank locker.

You’ll notice that I’ve structured these questions to answer precisely which asset class in the gold universe is for you.

What decides the price of Gold?
In India, it is the MCX price of gold + Refining charges by precious metal refiners + Margin of retail sellers + 3% GST.

What decides the MCX price of Gold?
It is the Price of gold in NYMEX or LME in dollars + Conversion rate USDINR + Customs Import duty.

ETFs only incorporate the MCX price (where authorized participants hedge after physical exposure)
Digital incorporates MCX price + 3% GST
Physical incorporates all of the above (Digital + Refiner/Retail seller margin).
SGBs are a different beast. Will talk about it later.

Based on you considerations, you should:
1. Buy physical if you want to leave it for your kids/for emergency family financial liquidity/wish to avoid counterparty risk.

2. Buy ETF if you want it for short term profits, or for rebalancing at times when equity is down. The expense ratio of ETF is compensated by absence of GST (for approx 3 years).

3. Buy SGBs if you’re uncomfortable holding it coz its a pretty rock. They theoretically give you an exposure to gold with 2.5% interest on the issue price of the SGB tranche.

4. If you’re uncomfortable with holding gold at your home, but OK with paying GST and are comfortable with counterparty risk, go for Digital. They usually have the option of conversion to physical by paying a nominal making and delivery charge.

Now, I’ll discuss where to buy each of these:

1. Physical: If you have a family jeweller, stick to them. If you’re a milennial who’s never had a family jeweller, head over to https://www.coinbazaar.in/. They’re trustworthy (I’m not an affiliate. Have bought from them multiple times. Hence recommending..). They’ll deliver right tp your doorstep and via insured post.
An important thing about physical is that, the percentage of making charges over your actual gold price, goes up of you buy smaller quantities. Hence when buying direct physical, buy large quantities (like >=5 gms of gold or >=half kilo of silver).

2. Digital: If you want to buy physical, want to average down via small quantities to eventually order physical, go via Digital exposure. You can buy in extremely small quantities. Accumulate and then order physical off the larger amounts once they accumulate. For this service I use https://www.bullionindia.in/. They have a phone app by the name of Goldella (Not very secure. Hence I just accumulate and order physical as soon as it reaches 10 gms)., Earlier they were called Augmont. That has branched off now. Again, I’m not an affiliate, just speaking from experience. I used to buy in Rs. 1000-2500 tranches on Augmont when gold price fell > 2%, and order delivery off eventually.

3. ETFs: There’s not much to say in ETFs, if you have short holding periods. For longer (> 3 years) holdings, the expense ratio (average 0.8%) will kill. Also, the hedging by the authorized participant, will reduce the NAV of your ETF vs. the actual price of gold. So, be careful with these. Hold these, only if you wish to rebalance into equities/bonds at a later date (basically, only to hedge against portfolio volatility).

4. Sovereign Gold Bonds: These are a different beast, like I said. The gold bond is a weird amalgamation of a bond and gold. List of characteristics:

a. The interest (2.5%) of the bond is on the issue price rather than the current price. That creates an interesting opportunity of buying a bond which was issued when gold price was high and is trading at a lower price now. Example below (par price is the issue price):

b. Since the bond pays out biannually 1.25%, the price of the bond goes down immediately after the interest payment date and rises slowly until the next payment date. This doesn’t create an arbitrage opportunity, but makes sense to buy after the next interest payment date to reduce the tax liability of the interest paid out.

c. Liquidity of the bond tranche matters when you’re buying. Just to get a better price. The highest liquidity as of now is in the August 2020 issue (the ticker varies with the broker. On zerodha it is SGBAUG28V). Buy around this tranche to get a good price. Else the spread varies from Rs.20-150 per bond (more visual details in the video above).

d. After the premature maturity of the bond at 5 years (when holders are allowed to exit via RBI), the price of the bond more closely mirrors gold price (before that it doesn’t as much). Hypothetically that can be due to reduced duration of basis (3 years) or due to low liquidity. This explanation was given by @milan_borad on twitter. And it makes sense.

e. The latest bond is available for issue whenever RBI issues a new tranche. It can be bought via banks, directly from RBI via demat, or via the secondary market after 15 days of issue. I always prefer the secondary market as it allows me to time the purchase (when gold price crashes), and allows me to sell it back in the secondary market if I need liquidity (not so if you buy via banks – then you have to hold for at least 5 years).

f. An additional benefit is that it can be pledged if your broker allows, for trade margin. Who doesn’t want leverage which pays a positive carry? Not as much as liquidbees, but the risk premia of gold as a volatile asset must be paid. #itsWorthit.

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Cheers. See you in the next one…