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The financial market provides investors with various instruments to invest and grow their wealth. While some are physical assets, others are derivatives deriving their values from underlying assets. One such instrument is paper gold.
Today’s article discusses paper gold, its benefits, and how you can invest in it.
What is paper gold?
Paper gold, as the name suggests, is gold in paper. Are we talking about gold foil paper? No, here is what it means.
Paper gold is a document or a certificate carrying the value of gold without giving the investor the possession of physical gold. It is similar to a derivative where the price of the paper varies as per the underlier, which is physical gold. The price of paper gold depends on the existing market value.
Benefits of investing in paper gold
- Investors sometimes choose paper gold investments over physical gold due to the ease of storing paper gold. Since paper gold does not involve the possession of real gold, the botheration of storing the precious metal is eliminated.
- Investing in gold jewellery may be expensive due to additional costs like making charges and wastage. Paper gold does not pose this issue to investors, allowing them to buy a higher value of paper gold at the same price.
- Another significant benefit of investing in paper gold over physical gold is letting go of the risk of theft. Physical gold is subject to theft, while paper gold is stored in electronic format in demat accounts, keeping it safe and secure.
- Investors can start small while investing in paper gold. Unlike physical gold, paper gold does not require investors to buy a minimum quantity of gold, which increases the expense.
Despite the benefits, some people do not prefer investing in paper gold due to the lack of awareness. It also does not allow investors to enjoy the aesthetic and luxury value that comes with owning physical gold.
The brokerage and membership costs associated with paper gold trading might also be high, impacting the overall profit of investors.
Investing in paper gold through ETFs can expose investors to counterparty risks when ETFs buy and sell gold to maintain a balance between demand and supply.
How to buy paper gold?
- Gold ETF
Investing through Exchange Traded Funds (ETFs) is one of the popular ways of buying paper gold. Similar to stocks of public companies, gold ETFs are available to the public on stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Despite brokerage charges for buying paper gold on the stock exchange, the overall cost required is usually lower than physical gold’s price. Trading through ETFs also helps investors track the prices constantly and take necessary actions immediately.
Some examples of Gold ETFs listed on the National Stock Exchange:
Axis Gold ETF launched in November 2010
Birla Sun Life Gold ETF launched in May 2011
HDFC Gold Exchange Traded Fund launched in August 2010
- Sovereign Gold Bonds (SGB)
A bond is a debt instrument issued to raise capital in the form of loans from the public. A Sovereign Gold Bond is one such instrument issued by the government to raise debt from the public.
SGB is a form of paper gold that does not involve physical possession of gold. It gives holders a bond certificate whose value depends on the prevailing market price of gold. Investors pay the issue price as set by the government and get the market price during redemption.
Given the government’s backing, SGB is an ideal option for those looking at safe investments with regular income.
- Digital gold
Digital gold is another form of holding gold without its physical possession. Like other forms of paper gold, digital gold involves investing money to receive a document stating the value of gold an investor owns. In parallel, the seller stores the corresponding quantity of real gold in a vault on the investor’s behalf.
Digital gold usually involves buying 24 Karat gold, which is currently the highest level of purity. Jewellery brands like MMTC Pamp, Tanishq, etc., allow investing in digital gold, which can then be exchanged for physical gold as per the investor’s requirement.
- Gold mutual funds
Apart from the above options, investors can buy paper gold by investing in mutual funds involving gold. Investors can look for hybrid funds that invest in multiple assets including gold.
Gold is a precious metal, which has been giving the benefit of capital appreciation to investors for a long time now. With technology improving, the concept of replacing physical gold with paper gold is getting popular. Despite the risks, holding paper gold is a wise approach to diversify an investor’s portfolio.
Despite being beneficial in various aspects, paper gold is subject to risks like all other financial assets. However, investing in paper gold through Sovereign Gold Bonds might be the safest of all options available since it is backed by the Reserve Bank of India and the government.
Yes, paper gold is a liquid asset. Similar to other assets, paper gold can be sold too. Specially ETFs and sovereign gold bonds can directly be sold in the stock market.
Capital gains on paper gold transactions are taxable. So, if an investor makes a profit by selling paper gold, long-term capital gains tax rates are applicable. Short-term holdings are taxed at the usual income tax rate upon selling.
RBI gold usually refers to buying sovereign gold bonds. Investors can buy sovereign gold banks through commercial banks, either offline or online, through the bank’s portal.
– Physical gold involves holding gold either as gold bars or gold jewellery. Paper gold, on the other hand, is a certificate reflecting the value of gold.
– While physical gold needs to be bought in a particular denomination, paper gold can be bought at any value.
– Physical gold may or may not be a financial asset, depending on how it is used. Paper gold is always a financial asset.