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Avoid gold investments for some more time

August 19, 2015 10:07 IST

It makes sense to wait for govt schemes such as gold bonds.

Puneet Lakhotia, a private bank employee, wants to purchase gold for his daughter’s marriage.

With gold prices coming down sharply in the recent months, he feels it could be a good time to buy now. But when he reads reports which suggest gold could take a further hit if US increases rates, he is unsure if the timing is right. 

With returns gold exchange-traded funds (ETFs) down 10.38 per cent in the past year, existing investors are already suffering.

Recently, Chris Wood, managing director and chief strategist of CLSA, has said gold could fall to $1,000 an ounce if the Federal Reserve increases its interest rates. 

Most experts advise against investments in gold. If at all someone still wishes to take a call on the price movement, there’s no quick money to be made, says Jayant Manglik, president, Religare Enterprises.

He cautions those taking a view on gold should do it with at least one-year time frame - the longer the better. At best, like Bhargav Vaidya of BN Vaidya Associates says, it can only be used as an investment to store value. 

The government, on its part, has been trying to mobilise domestic gold and curb imports as well as it is drain on forex reserves.

On Monday, the tariff value on gold was raised from $354 for 10 gms to $363 for 10 gms. Tariff value is the base price at which custom duty is levied.

While the tariff value sees a periodic change due to rise or fall in prices, the present government has kept the earlier policies of the government, including hike in import duties to 10 per cent, unchanged. 

Instead, it has opted for other schemes both to invite gold investments through a gold bond scheme and unlocking the existing supply through the gold monetisation scheme.

Though only draft scheme details have been laid out, experts believe the former will be a good option for the potential gold investor.

“Gold sovereign bonds may triumph over other comparable products in the market such as gold exchange traded funds, physical bars and can lead to a reduction in India’s current account deficit,” notes a report by India Ratings and Research. 

Vaidya says this scheme will work out to be a win-win for the government as well as for those investors who buy physical gold for investments or future use.

The best feature is that it will have the government guarantee, which will be the highest grade of investment. 

Sovereign gold bonds are papers or certificates issued by the government saying investors bought a certain amount of gold.

The bonds will be issued in denomination of two, five and 10 grams of gold. The tenor would be a minimum of five to seven years to protect investors from medium term volatility in the gold prices.

“On maturity, the investor receives the equivalent of the face value of gold in rupee terms. The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10,000 at a certain per cent, say two or three per cent,” the proposal stated. 

To invest, the customer will not need to go through any special Know Your Client requirement – it will be same what it is for gold.

The instrument will be listed to give investors liquidity and they can also be used as collateral to take a loan.

The taxation of these bonds will be exactly like that of metal in physical form.

If held for three years, the investor will need to pay long-term capital gains tax of 20 per cent with indexation and if the holding period is less than 36 months, the gains are added to the income and taxed according to slabs.

Tinesh Bhasin in Mumbai