In what form should you buy gold?

Gold is not just for ornaments, it can be considered for investment purposes. Gold as an asset is a store of value, even though it does not provide any income or interest.

Following are the different forms that you can buy gold in.

1. Jeweller – physical gold ornaments: This is the old fashioned way to buy gold, in jewellery form. It’s convenient, especially if you trust your jeweller and their workmanship.

The risk of buying gold from a jeweller is that you might never be sure of the purity of the gold – there could always be the risk of being sold impure gold of lower karats than what you think you are buying.

Additionally, whatever you pay for has 2 components to it: 1) the cost of the gold material, which is where the value is, and 2) the workmanship or preparation costs. In the resale market you might not get enough value for the workmanship of the ornament, unless it has an antique or scarcity value associated with it.

And for many people it’s probably worth buying more gold in physical form rather than ornament form where you don’t have to pay for workmanship. Finally, there are also risks associated with the storage of gold in jewellery form – you will always have to keep your ornaments safe and away from the risk of being stolen by household staff or those who you don’t trust.

2. Banks – physical gold coins and bar: Many reputed banks sell gold coins and gold bars that come with a certificate assuring you of the purity of the gold that you are buying.

To get such a certificate of purity, you might have to pay an extra 1%-3% over the price of gold. Also, when you buy gold through banks, you must keep in mind that you won’t be able to sell it back to the banks as they don’t have the authority to buy it back. You can, however, sell it to a jeweller.

Like jewellery, holding gold in coins or bars requires that you have a safe and secure locker so you can minimize the risk of theft of your valuable holdings in gold.

3. ETFs – gold in paper form trading on an exchange: ETFs, Exchange Traded Funds, are instruments that trade on the stock exchanges. When you buy an ETF, you do not get delivery of the physical gold, but rather get a certificate signifying your ownership of the material. The custodian of the ETF secures the gold that supports your certificate.

The advantage of investing in this “paper form” of gold (as opposed to physical form) is that you can trade it on the stock market and get out of it or buy more just by calling up your stock broker. You don’t have to incur the hassles of keeping the material in a safe place, or of finding a gold jeweller you can trust. You buy and sell at the prevailing market price, without having to pay a profit margin to the jeweller.

Also, you can be rest assured that the purity of the gold is the highest.

In a country like India where most of us like to touch and feel tangible things, the idea of buying gold in paper form like an ETF is novel, and will take some getting used to. If one is old fashioned, this might not suit everyone.

Also, you will have to declare your PAN card and other details, like you would if you trade through a demat account, and for some people who use their undeclared income to buy gold (or convert it into gold), the disclosures required might be too demanding.

Whichever form of gold you find most suited to you, it’s worth investing at least 10% of your investible portfolio in gold to provide stability and protection against inflation.