Saturday, November 6, 2010

Gold Coins vs. Gold Exchange Traded Funds - Advantages and Disadvantages

There was a request from one of the visitors on our blog to describe the differences between investing in Gold coins and Gold ETFs. So, here are our findings. Please leave comments on the post and share your views.

India has been traditionally a buyer of gold jewellery - a common gift during religious events and weddings. But consumers are becoming increasingly aware of the benefits of holding gold in other forms like coins, bars, and via exchange traded funds. Infact, India's Postal Service has sold more than a half-tonne of gold coins in the last two years since starting the sale of gold coins. This is a sign the yellow metal is gaining acceptance as a form of investment in India.

Gold ETFs basically are a way that you can buy or sell small pieces of huge piles of gold, stored in vaults maintained by a custodian, with the same convenience as buying and selling stocks on an exchange. So far to date, the price of these ETFs have very closely tracked the spot price of gold. However, investor will have to bear the cost of demat account and its annual maintenance. Investors can easily resell the ETF at any point as there is enough liquidity in the market.

Gold coins or bars are physical form of gold that investors can use to invest in Gold as a commodity. Since, there is physical delivery of this commodity, investor will require a bank locker to safely store it. So, they would have to pay a fixed locker fee annually for this. Banks or Jewellers cut some percentage during the resale of the gold coin. If you resell the gold coin to another Jeweller they are bound to cut a bigger percentage during resell even if you have the gold purity certificate. So, effectively investor is tied to the Bank or Jeweller from whom they bought the gold coin. Ofcourse, the coin has the advantage of gifting it to your near and dear ones during festivals or marriages - a theme prevalent in India.

Both Gold Coins and Gold ETFs have their advantages and disadvantages. Depending on the need, investor can decide what is best for them. Both Gold coin and Gold ETFs track similar with respect to profit and expenses. Gold coin is physical form of storing Gold. So, investor need to store it securely but is handy while giving gifts. From a long term perspective, Gold coin may not have risks that may be associated with a structured financial product like ETF. Gold ETF may be good for short term and medium term investors who want to buy and resell the ETF regularly as there is lot of liquidity in the exchange.
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  1. Great Comparison.. In Indian context, Gold coins still hold lot of value.

  2. Thanks for the information, Here is another article i found very informative, so I'm posting to the finance community

  3. Thanks Sudip for your article link. It is also very informative.