Friday, May 16, 2014

Change in govt policy can boost gold investments
~~By Arnav Pandya

May 15 2014: There has been a waning interest in gold funds, including gold exchange traded funds (ETFs), as prices in international markets have cooled, leading to falling returns on these funds. Apart from that, two policy decisions could impact these funds once the new government takes over: import duty and import restrictions. Any changes in these policies will have a significant impact on gold prices in the country, along with the value of gold funds for investors. Here is a closer look at the matter.

Current picture: Right now, a high 10 per cent duty is levied on gold imports. Since all the gold that is consumed in the country is imported, this means the cost of gold is pushed up to that extent. There are also other import restrictions on gold, due to which a premium has to be paid in the domestic market. This means consumers are paying more for the gold they buy in the country. When it comes to gold ETFs, the Indian investor is also paying more because this local price is applicable for the tracking of funds. Hence every investor pays a higher amount when they buy a fund.

Reduction: There is a good chance that the entire gold import norms and duty structure is re-examined by the new government that comes to power. If there is a reduction of duty and removal of import restrictions, there could be a sharp drop in the price of gold and gold ETFs. This can come as a big shock for investors, who could find themselves in a sticky spot as suddenly their investment shows a negative return. This is something that has to be watched out for and avoided if the investor’s aim is only to gain from short-term movements in gold price.

Preparation: Adequate preparation is the key to the entire process for the individual. Those who are waiting for gains on their investment should sell out and wait for the fall to happen before they look for better opportunities again. The other point is that for the long-term investor who actually wants to build exposure to gold by making small investments at regular intervals, here is a chance to add to existing holdings at a lower cost. Thus the situation is different for people with differing aims. Understanding your own requirements is the key to adroit investment in gold.

(The writer is the CA and certified financial planner)

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