Why ETFs are better than physical gold for investment

Compulsive shoppers are queuing up outside jewellery shops in large numbers to make the most of the recent fall in gold prices. A shopper who managed to get inside a shop in Mumbai says the store resembled an overcrowded long-distance local train during peak hours. Another shopper complained that the jeweller had taken most of the interesting pieces off the shelves, claiming that everything is sold off to ward off the crowd. Probably, he wants to wait for the prices to rise again, she says ruefully.

There are also stories doing the rounds that jewellers are refusing to buy back gold at the current price, instead insisting on a discounted price. In short, gold is making headlines, but, sadly this time, not for glorious reasons.

Precious metal won’t glitter forever:-
Just as gold is set to breach the Rs 25,000-mark after a splendid run that lasted more than a decade, unlike the jubilant shoppers, investors in the yellow metal are a worried lot. For those who were sitting on profits, the tumbling was a rude awakening that the precious metal won't glitter forever. They also know that it is a "little too late" to sell and get out. As for those who were waiting in the wings for a price correction before investing in gold, they are a bit unnerved by the flood of obituaries for the yellow metal as a safe haven. Naturally, they want to be sure about the prospects of gold before investing in it. The only happy souls, it seems, at the moment are jewellery shoppers.

On a free fall:-
The writing was on the wall for some time. The sceptics had been predicting the end of the bull run in gold, which has been almost uninterrupted for the past few years. However, most conservative investors were dismissive. They had solid reasons: as long as there is chaos all around, gold will continue to glitter, they argued. Look around: the US is hardly out of the woods; Europe crisis shows no signs of abating; and Indian story is almost written off. While these arguments had merit, the metal has lost its sheen. From a record high of Rs 32,500 per 10 gm in November 2012, the yellow metal has tumbled to Rs 25,680 on Wednesday. However, after the recent fall there are many voices singing in chorus about the demise of gold. Gold prices unlikely to reverse downtrend:- "The confidence in gold has been severely dented given the magnitude and the forcefulness of the recent fall. Fears of a Cyprus gold sale, liquidations in ETFs and unwinding of long positions by institutions in the international markets have contributed to the downfall," says Kishore Narne, head, commodities, Motilal Oswal Securities. "The prospects of any meaningful recovery in gold remain weak and given the lack of any major triggers in the near term, gold prices are unlikely to reverse the downtrend anytime soon. Short-term pullbacks are entirely possible given the speed at which prices have declined, but we anticipate another 12-15% fall from here on domestic markets before the end of FY14," he adds.

Buy, hold or sell?:-

Are you about to hit the panic (or sell) button because of the collective pessimism all around you? Well, you should try to sooth the nerves and hold on to your investments for a while, say experts. "Selling gold at these levels is not advisable at all. Hold on to your current gold investments. Remember, gold is akin to currency. In the long-term, it will move up," says Devendra Nevgi, founder and partner, Delta Global Partners. Even if you don't share the optimism, you have no choice but to hold on to your investments — especially if you bought gold when the prices were hovering over Rs 30,000. "Retail investors wrongly thought that gold would help them get extraordinary returns. They should consider gold simply as part of the overall portfolio. They should not dump their investments in gold now," adds Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. Invest in gold in a piecemeal manner now As for those waiting in the wings, many experts believe that they should consider investing in gold in a piecemeal manner now. "Retail investors should look at meeting 30-50% of their intended investment target for the year right away," says Nevgi. The remaining investment should be staggered over a period of a year, he adds. However, not everyone is recommending increased purchase of gold now. "Currently, we are not recommending additions to a client's portfolio despite weaker prices. At the moment we have a contrarian view and recommend trimming at price gains. As inflation concerns subside, gold as a 'hedge' is likely to subside," says Vishal Kapoor, general manager, wealth management, South Asia, Standard Chartered Bank. This apart, you should get in now only if you can stomach a lot of volatility in the short-term.

Invest through gold ETFs or demat gold-

"I think gold prices are very close to the bottom now. Investors should not try to time the market and instead invest systematically through gold ETFs or demat gold on the exchanges like NSEL. This will help them average out the cost of acquisition. They should also avoid leveraged buying. The volatility in gold prices is very high and even a movement of $40-50 could adversely affect your portfolio's value," says Priti Gupta, director, commodities and currencies, Anand Rathi Financial Services. You could consider monthly investments to even out fluctuations. Also, stick to your allocation. "They should keep their total exposure to gold in the 5-7% range and not try to time the market," says Sadagopan. Remember the basics: gold ETFs are always better than physical gold for investment purpose. Apart from better liquidity, it also eliminates the making charges and cost and risk of safe keeping. The pricing structure is also transparent. Other investment choices are gold coins and bars.