generating income while in possession — unless someone pays a higher or lower price at the end of the ownership period.
Owners of gold, cars or other assets cannot make money from them unless these are sold to a third party at a higher price. In fact, they have to deal with depreciation and other expenses of owning an asset.
An asset merely retains its value over time, producing no income for the holder. However, sound investments made in shares, bonds and other similar instruments will not only appreciate in value if handled properly, but also provide regular income in the form of interests and dividends.
Therefore, instead of holding a risky asset, it makes a lot more sense to invest in a risky investment, even if it it related to the same asset.
Do ETFs score over physical gold?
The recent upsurge in the popularity of exchange-traded funds (ETFs ) has presented a new and better way to invest in gold. ETFs are basically a kind of mutual fund that is traded on the stock exchange, just as a regular stock. It is akin to purchasing physical gold and storing it for as much time as possible in a demat account.
The portfolio is fixed way in advance and doesn’t change with time. More important, one need not worry about the storage, purity and safety of the investment. ETFs can be purchased in small quantities and, being a liquid investment, they can be sold easily for a good value.
ETFs sell at the standard market rate and the proceeds are realised within two working days of the sale. This makes gold ETFs a transparent and much better investment compared to physical gold.
The gold buffs among you might be having a minor heart attack after reading the Oracle of Omaha’s views on the subject, but these facts are difficult to deny. This doesn’t imply that gold is a poor choice, especially for the short term. It’s just that you should know the real story before you bet heavily on this shiny metal.
The writer is CEO, BankBazaar.com