Ways to Invest in Precious Metals: Gold & Silver

Ways to Invest in Precious Metals: Gold & Silver

In times of economic turmoil, precious metals (gold, silver) tend to retain their value or even appreciate. It is for this reason that they are so attractive as investment options as they provide a buffer to an equity-debt portfolio, as well as appreciate over time.

Unlike gold, silver has immense technical and industrial uses as it is an excellent thermal and electrical conductor. It is widely used in specialist electronics and solar panels. Its anti-bacterial properties also make it popular in the medical industry. Less than 10% of the gold mined is used for industrial purposes, but in the case of silver the number is 50%. These applications create a fundamental demand for silver, the intensity differing over various economic cycles with higher demand during boom times.

Investors can diversify by investing atleast 10% of their portfolios in low-risk assets like silver, gold, etc. This will reduce the overall risk exposure in their investment portfolio. 

GOLD

1. Physical Gold:
The price of physical gold varies by geography. It’s a traditional method of investment, but storing and insuring physical gold can be cumbersome and costly.

2. Gold ETFs (Exchange-Traded Funds):
Gold ETFs are financial instruments that hold gold bars, with each share representing a portion of that gold. These ETFs invest in gold bullion or futures, with prices that closely track the price of gold, although minor deviations due to tracking errors may occur.

• Advantages: Gold ETFs are more transparent, liquid, and closely aligned with market prices than physical gold. They can be bought and sold online and held in Demat form. One unit of a Gold ETF typically equals one gram of gold. They also have lower costs, with annual charges including brokerage and an expense ratio ranging from 0.50% to 1.00%.
• Taxation: Earnings from ETFs are taxed according to the investor's income tax slab, irrespective of the holding period.
• Liquidity: Gold ETFs are highly liquid and can be traded freely without a lock-in period, making them suitable for short, medium, or long-term investment objectives.
• Purity: 0.999 purity gold bullion is the underlying asset of gold ETFs.

3. Gold Mutual Funds:
Gold mutual funds are open-ended funds that invest directly or indirectly in gold assets. Unlike Gold ETFs, the value of one unit in a gold mutual fund doesn’t correspond to one gram of gold.

• Investment Method: You can invest in gold mutual funds through SIPs (Systematic Investment Plans) starting from as low as Rs. 500, or via a lump sum. The returns are linked to the performance of physical gold, gold ETFs, or gold-related securities.
• Types: Examples include gold mining funds and gold funds of funds (FoFs). Gold FoFs invest in units of Gold ETFs, and you don't need a Demat account to invest.
• Costs: Gold mutual funds have an annual expense ratio between 0.6% and 1.2%, which includes management fees and ETF fees. Redeeming gold mutual funds within a year may incur an exit load of 1-2%.
• Liquidity: Gold mutual funds are more liquid than Gold ETFs in India, as they can be quickly bought or sold.

 

 

 

Comparison: Gold ETF vs. Gold Mutual Fund

4. Sovereign Gold Bonds (SGBs):
SGBs are government-backed securities denominated in grams of gold. Investors pay cash for the issue price and hold the bonds for a specific period. Upon maturity, the bonds can be redeemed for cash equivalent to the prevailing gold price.

• Interest: SGBs offer a fixed interest rate of 2.50% per annum, which is tax-free if held until maturity.
• Purity: The issue of sovereign bonds is based on 24 carat gold price of 99.9% purity gold. 
• Security: SGBs are a digital asset stored in a Demat account, eliminating the risk of theft.
• Lock-In Period: SGBs have a lock-in period after which they can be redeemed. The redemption price is based on the average closing price of gold (99.9% purity) 3- days prior to the redemption date.
• Minimum Investment: The minimum investment in SGBs is one gram of gold.

Unlike physical gold, SGBs do not carry the risk of theft and are a more secure and tax-efficient way to invest in gold digitally.

Silver ETF

Investment Exposure:

A Silver ETF is an exchange traded fund, listed on the National Stock (NSE) Exchange and Bombay Stock Exchange (BSE). The ETF invests in 99.9% purity physical silver and may also participate in Exchange Traded Commodity Derivatives (ETCDs) with silver as the underlying commodity. These ETF units are held in a demat account. So, one can buy, sell or trade these units at ease during any time of the trading hours just like stocks.

Silver ETFs track the spot price of silver in the open markets. Fluctuations in the price of silver will change the NAV of these ETFs. Each unit of a silver ETF represents 1 gram of physical silver and is stored in a secure vault by the Asset Management Company. 

The fund managers must obtain auditor reports on physical verification of the silver stored in vaults at regular intervals.

 

Features of Silver ETFs

·       Purity: The underlying of silver ETFs is 0.999 purity silver bullion. 

·       Taxation: Silver is a capital asset. An individual’s investment in bullion attracts long-term capital gains tax if held for more than 36 months. In such a case, gains from silver are considered taxed at a flat rate of 20%.

However, if the investor’s holding is for less than 3 years or 36 months, profits are treated as short-term capital gains and are added to the regular income, which is taxed as per the respective tax slab.

·       Tracking Error: Tracking error is the difference between the returns of a scheme and that of an underlying benchmark. Fund houses must keep their tracking error within a range of 2%. If it exceeds 2%, the fund houses must mention tracking error percentage on their portal.

·       Expense Ratio:

SEBI has mandated that fund houses cannot charge more than 1% of the Silver ETF scheme’s assets under management as the expense ratio.

 

Gold ETF vs. Silver ETF: Where Should You Invest?

If you’re more conservative investor with a low appetite for risk, consider investing in gold ETFs due to their relatively stable nature. For more risk-aggressive investor with a high tolerance for volatility, silver ETFs is a choice.  

Author
Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant

 

Avoiding - Mid-Life Economic Crisis for India

 

Avoiding - Mid-Life Economic Crisis for India

The term "middle-income trap" has become increasingly common among policymakers to describe middle-income economies that seem unable to transition to high-income status. This concept, discussed in the World Development Report 2024, highlights that countries often hit a "trap" at about 10% of annual U.S. GDP per person, around $8,000 today. As of 2024, India's GDP per capita is $2,731 (nominal), and its GNI per capita is $10,123 (PPP).

Understanding the Middle-Income Trap:

According to the World Bank, lower middle-income economies have a GNI per capita between $1,136 and $4,465, while upper middle-income economies fall between $4,466 and $13,845. High-income economies have a GNI per capita above $13,846. Over the past 70 years, many low-income countries have rapidly developed, lifting millions out of poverty. However, only a few have achieved high-income status, with income growth often being variable and volatile.

In recent years, policymakers in slower-growing middle-income countries have focused on the middle-income trap. While its existence is debated, the concept encourages a reassessment of strategies once traditional growth sources diminish. Middle-income countries must drive productivity, innovation, and competitiveness while strengthening economic fundamentals to foster and stabilize growth. Achieving high-income status is challenging and prone to growth slowdowns, but stagnation is not inevitable.

Origins and Evidence of the Middle-Income Trap:

The middle-income trap was first described by Indermit Gill and Homi Kharas, noting that regions like Latin America and the Middle East often experience slowdowns after rapid growth from low to middle income. This growth, driven by cheap labour and basic technology catch-up, eventually loses momentum as wages rise and the rural labour force shrinks. Without new growth sources, countries struggle to compete with low-wage or high-innovation economies.

Empirical evidence from Latin America and the Middle East supports the middle-income trap, with many economies remaining at middle-income levels for decades. Of the 101 middle-income countries in 1960, only 13 became high-income by 2008. Research shows that growth slowdowns are more likely at middle-income levels, particularly around per capita incomes of $10,000-$11,000 and $15,000-$16,000 (PPP-adjusted). Some models suggest low-productivity equilibria in middle-income countries, characterized by low shares of skilled workers.

However, other evidence questions the trap's existence. Many countries have seen steady income growth since 1960, and the transition from middle to high income does not take longer than other transitions. Historical evidence shows economies move up across income groups, with those achieving high-income status experiencing faster growth even at lower income levels.

Avoiding the Middle-Income Trap:

The World Development Report 2024 outlines strategies for developing economies to avoid the middle-income trap. Lower-middle-income countries must adopt modern technologies and business practices, while upper-middle-income countries need to push the global frontiers of technology. This requires reconfiguring economic structures to enable greater economic freedom, social mobility, and political contestability.

Today, 108 countries are classified as middle-income, housing 6 billion people. Since the 1990s, only 34 middle-income economies have attained high-income status, accounting for less than 250 million people. The median income per capita of middle-income countries has never risen above 10% of the US level. Climbing to high-income status will be harder due to high debt, aging populations, and growing protectionism.

The "3i strategy" recommended by the World Development Report 2024 includes:

1)     Investment: Low-income countries should focus on increasing investment.

2)     Infusion: Lower-middle-income countries need to adopt modern technologies and business practices.

3)     Innovation: Upper-middle-income countries must drive innovation and push technological frontiers.

 

Key Actions for Middle-Income Countries:

1)     Discipline Vested Interests: Implement competition regimes to encourage new entrants and prevent large corporations from stifling growth.

2)     Reward Merit: Accumulate and allocate talent efficiently, enhancing the use of skilled workers.

3)     Capitalize on Crises: Use crises as opportunities for tough policy reforms, focusing on energy efficiency and emissions reduction.

 

Conclusion:

For India to escape the middle-income trap and achieve high-income status, it must transition from a trading economy to a manufacturing one with a prime focus on exports. Emphasizing research, innovation, and technological development is crucial. Additionally, designing an education system that is industry-centric while preserving cultural values will support this transformation.