Deconstructing the yellow metal’s sheen

Nov 28 2012, 01:59 IST
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SummaryIn order to reduce the quantum of physical holdings in the country, the deputy governor of the Reserve Bank of India, Subir Gokarn, has proposed the idea of holding the metal in demat format like any other financial product.

largest importer of gold in the world. In 2011, World Gold Council data shows, the demand for gold increased to 961 tonnes valued at $47.8 billion dollars. In the nine months to September this year, India has imported 591 tonnes of the precious metal valued at $32.5 billion. Demand had slowed down in the three months to June this year to 181 tonnes because of high prices, and a nation-wide strike among jewellers in protest of government plans to increase the excise duty on refined gold from 1.5% to 3%. However, after much pressure, the government rolled back the the proposed hike before the auspicious Akshaya Tritiya festival. The demand of the metal, however, picked up in the three months to September this year to 205 tonnes because of festival and marriage buying. Moreover, according to the World Gold Council, although lower monsoon rains during August had curtailed demand, a recovery in rainfall during September boosted sentiments and drove the relief-related demand. With the price of gold almost doubling in the last two years, the metal has given the best 5-year returns as compared with bank deposits and the Sensex. Traditionally, like everyone globally, Indians too consider gold as a good hedge against inflation and with headline inflation remaining sticky, the demand for the metal has risen.

How do Indians invest in gold?

In the physical form, jewellery accounts for about 60% of the total demand and the rest is in the form of bar and coins, basically for investment purposes. Increasingly, Indians are also investing in gold ETFs with mutual funds because, by investing in the paper form, one can eliminate issues related to purity, insurance, storage and even reselling. The assets under management of mutual funds went up from R743 crore in March 2009 to R11,477 crore in October 2012. One can invest in the yellow metal through the mutual fund route or gold systematic investment plans. It enables the investor to invest in the yellow metal in paper form. One can also invest in e-gold through the National Spot Exchange. With a demat account, one can buy gold in units as small as one gram from the exchange where you have to open a demat account and this can be converted into coins and bars. Gold purchased from the spot exchange is cheaper than buying from banks and the exchange also follows a certification process

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