We just don't think straight when jewelry is involved. We use jewelry to express our feelings, we give priority to jewelry over other ambitions and common sense, and we take jewelry as an expression of affection. And that is why we should tread very carefully while investing in gold commodity.
Bullion means gold or silver, more than 95% in purity. It's no secret that we Indians are the biggest consumers of gold. Festivals and weddings involve huge purchases of gold and silver irrespective of market prices. Unlike earlier when it was only possible to invest in bullion by physically buying it, today there are a lot safer and better ways to invest in it like gold commodity.
Physical Gold bought this way is stored in the form of bars and coins, and often converted into jewelry. When converted to necklaces, earrings, bracelets, bangles, anklets, etc, there is invariably some wastage of the precious metal. Also the making charges add up to 15% to 20% of the total price. Physical gold can be bought from banks as well as jewelers, however it can only be sold back to jewelers. Some banks do buy back but it's at considerably higher rates than the international bullion prices.
Exchange traded fund (ETF)
You can now invest in high-purity gold through your demat account.
An ETF is a mutual fund scheme that invests in gold, which is held in paper or the dematerialised form, just like stocks. Returns on gold ETFs are more or less the same as that of physical gold. Investors get units for their holding in the gold ETF. Gold ETFs are listed and traded on the stock exchange. Gold ETFs have several advantages such as liquidity, safety, tax benefits, and is cheaper than buying physical gold.
Equity Based Gold Fund
Instead of gold, these funds invest in companies engaged in mining, extraction or processing of gold (either directly or through global mutual funds).
Given the limited opportunities in India, these funds invest in the international market. They don’t require a demat account and are not subject to securities transaction tax. These are suitable for investors with a high-risk appetite. Such funds should be bought only after experience of investing in Gold ETFs.
If you are going to invest in bullion, avoid physical bullion as much as possible. Whatever needs to be bought for consumption should not be part of the investment decision and should not be funded from the money kept aside for investments. There are other ways, like gold commodities, to get more benefits.
The amount allocated for bullion investment should be split in the following manner:
60% to 80% in Gold ETFs
20% to 40% in equity based gold funds
The demand for gold is so high in our country that we have to import it in huge quantities. This means that a huge amount of foreign exchange is spent in buying gold or gold commodity.
Types of Commodities
Agri-based (Edible oils, Pulses, Grains, etc.)
Energy (Crude oil, Natural gas, etc.)
Base metals (Copper, Steel, Aluminum, Steel, etc.)
Precious metals (Gold commodity, Silver, etc.)
Futures market (both delivery and cash transactions)
Commodity based Mutual Funds and Exchange-traded Funds
Understanding Gold Contracts
Like every commodity, gold commodity has its own ticker symbol, contract value and margin requirements. To successfully trade a gold commodity, you must learn about the key components and understand how to use them to calculate your potential profits and loss.
The value of the gold commodity contract is dependent on the quoted price and is calculated by multiplying the current price by the actual price of the gold commodity contract.
Gold commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract.
The popular commodity exchanges in India are National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX), etc
Factors influencing gold's price and the price of gold commodity
Gold has a widespread commercial use as a coating on electrical connectors. It can be found on various devices, from audio and video cables to computer and component cables and connectors. Thus, the consumption has increased.
Worldwide, gold production is lesser than the demand. The World Gold Council estimates that the total gold mined annually is approximately 2,500 metric tonnes. Currently, 3,500 metric tonnes of gold is used in the jewelry, investment and commercial industry, and it is difficult to determine where the 1,000-ton gold shortfall will come from.
The International Monetary Fund (IMF) and the Washington Agreement on Gold (WAG) have very strict rules in gold sales: less than 400 tons per year, and members cannot use gold to back or replace their currency.
India is the largest worldwide consumer of gold, with an annual consumption estimated at 700 tons a year.