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Sunday, October 27, 2013

e Gold Vs Gold ETFs

The debate about physical gold versus gold exchange-traded funds, or ETFs, was settled in favour of the latter a long time ago. Now, e-gold, another product that gives exposure to the gold market, is laying claim to the crown. But before you take a plunge with your investments, make sure you understand the pros and cons about each one of them.


What is e-Gold?
E-gold, an electronic way to buy the yellow metal. It is an electronic form of Gold as a commodity.

How is e-Gold different from Gold ETFs?
  •  e-Gold gives better returns than Gold ETFs. In 2012, it returned over 16 per cent compared to the 11 per cent average return given by gold ETFs. In 2011, e-gold and gold ETFs had returned 32 per cent and 31 per cent, respectively. But remember that these are pre-tax returns. 
  • E-Gold is a commodity while Gold ETF is an exchange traded fund
  • E-gold is held electronically in the demat form and in India, it is offered by commodity exchanges such as the National Spot Exchange Limited (NSEL). Gold ETFs are traded in a stock exchange like NSE or BSE. Gold ETFs can be bought and sold like mutual fund units through the demat account via a depository.

Positives of e-Gold
  • e-gold will always beat gold ETF. in returns as the latter's net asset value, or NAV, is computed after deducting the fee of the asset management company plus storage and custodian charges, which vary from fund to fund. The cost of trading e-gold in the spot market is nominal. So the product is a lot more cost-effective for people who have a long investment horizon.
  • E-gold is held electronically in the demat form and can be freely converted into physical gold. Gold ETFs have to be sold only for cash, though there are some ETFs which do offer an option to convert it into physical gold at the time of delivery.
  • Since Gold ETFs are traded on stock exchanges, they can be traded (bought and sold) only between 9:00 AM to 3:30 PM on weekdays. However E-series products i.e. E-Gold can be traded from 10:00 AM to 11:30 PM on weekdays.

Positives of Gold ETFs
  • E-gold is treated like physical gold and qualifies for long-term capital gains benefits if held for three years or more. However, gold ETFs qualify for long-term capital gains treatment after being held for just one year. 
  • Gold ETFs are considered financial assets and hence are exempt from wealth tax, which is not the case with e-gold
  • If you have been trading in stocks, you can trade Gold ETFs from your existing demat and trading account, while you will need a commodity account with a Spot Exchange to buy e-Gold.
  •  
Summary
At present, investing in gold though ETFs would be more prudent for small investors. While it's true that investing in e-gold is relatively cost-effective, it's also a new product. It was launched only in March 2010 and, hence, should be given more time to evolve before retail investors venture into it.
Gold ETFs, on the other hand, have been around since 2007, are traded on reputed stock exchanges and are backed by good fund houses. The average daily volumes are significantly higher in the e-gold segment, but this could also be due to the authorised participation and contribution of high net worth individuals as the commodity markets have been seeing encouraging turnover growth for some time compared with that in the equity markets.

Cheers


Manoj Arora
Lead a Financially Free Life !!

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