Gold has been a valuable and highly sought after precious metals for Gold Coins, Jeweles and as a preserver of wealth for long even before the available recorded history. Indians have a special attachment to the gold in the form of Jewellery and buying more than 25% of Gold produced in the world every year. The world consumption of new Gold Found is about 50% Jewellery, 40% in investments and about 10% in Industry.
Everyone understands the importance of Gold but currently buying Gold even in smallest possible forms has been made easy by the Exchange Traded Funds or popularly known as Gold ETFs. Therefore the question is whether one should buy Gold in the form of ETF or buy Physical gold. Whether to buy Gold in Physical form or buy in the form of the ETF would depend on the purpose or objective of buying Gold
Gold from a Very Long term perspective then buying physical Gold would score over the Gold ETFs. Another advantage of buying Gold through God ETFs is that Gold ETS don’t attract the wealth tax whereas on physical gold you have to pay a wealth tax. However the performance of a Gold ETF Vs Physical Gold is subject to tracking Error.
If you are buying Ornamental Gold then the price quoted is generally higher (Goldsmiths charge a mark up usually around 5-6%) and making charges. Therefore it is not wise to buy ornaments if the purpose is purely investments. If you are buying Gold for Long term investments then buying Gold physically makes more sense. If you are buying Gold Coins from banks or from the market; you are charged a mark-up (varies from 5-10%) over and above the market price of the gold. And similar margin is generally deducted when you are selling the Coin or the bar in the market. Banks do not offer the buy back. Besides margin at both ends you also need to store it at a safer place preferably a locker in the bank which comes at a certain cost.
Gold ETFs other than the exchange transaction charges also charge you an Asset Management Fee which is generally around .5% to around 1%. Transaction charge would be around .2% to .5%. However the Mutual Funds don’t have buying or selling charges for their Gold ETF separately.
Therefore you should assume a cost of around 1% per annum on Gold ETF which is worry free with easy liquidity. In case of physical Gold the transaction charges of around 12% (if you negotiate well on both buying as well as selling) besides the locker cost and carrying risk.