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Wednesday, April 15, 2009

Gold ETF FAQ's

What are the benefits of investment in gold ETF?

When you go to the bank or a jeweller to buy the gold, you have to pay a certain premium. As a result, returns contract. A premium of 20% if charged on small coins of 5 gram each and 5-10% on the gold coins weighing more than 5 grams. When you go to jewelers to sell gold, it is taken back on a discounted price. Apart from this, you have to keep your gold in the lockers and pay for locker facility.

How is tax calculated on gold ETF?

There are more tax benefits on the gold ETF as compared to physical gold. Capital gains tax calculations are similar to the tax calculations on the bond funds. When you invest in physical gold, long-term capital gains tax is levied only after three years. In case of the gold ETF, which is a kind of mutual fund, long-term capital gains tax is levied one year after purchase.

You will get the benefit of indexation. But when you keep the physical gold, you have to pay wealth tax, which doesn't apply to mutual funds. If your wealth crosses Rs 15 lakh (Rs 1.5 billion) in a year, you have to pay 1% as a wealth tax. Besides this, you save on STT (Security Transaction Tax), which you have to pay on other securities in the secondary market

What are the benefits of investing in gold?

Worldwide, the government and individuals keep the gold. Many governments move forward and would want to keep their forex reserves in the gold. Developed countries such as USA and UK always try to keep 60-70% of their reserves in gold.

But some of the developing countries like India, Brazil, Russia, have only 1-2% of their reserves in gold. As US dollar is becoming volatile, its deficit in US is growing and US dollar, according to economists, will grow very weak.

Many of the developing countries are now thinking of keeping more forex reserves in the gold in order to prevent impact on their reserves due to volatility. So, governments will buy more gold in the future. Suppose there's a war or a big currency crisis, like the one in 1997-98 when currencies of strong economies like Singapore, Malaysia depreciated by 30-40%

While it is certain that the currency gets depleted in case of a currency crisis, stock market and bond markets also get depleted.Gold is an investment option, which can position against the tide.

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