Gold touched its new all time high of $1,244 per ounce recently. Existing investors must be wondering if they should sell and book profit. As for the new investors, they must be thinking whether to invest in gold to gain from upside or should wait for a correction.
After consecutive nine years of rise, will the 10th year be lustrous for this yellow metal? Should one hold/buy gold at this level?
Buying or selling gold is really difficult as one cannot arrive at an intrinsic value of gold. It is more about relative valuations. Here are some reasons which will help you take decisions.
n First Goldman Sachs scam hit the headlines.
n Then came the Greece saga. This led to further fears of the deficits among other nations. To overcome this problem, the European policy makers unveiled a loan package worth nearly $1 trillion and a program of securities purchases.
n With already a 800 billion current deficit, the new loan package has led to nearly doubling the deficit in Euro zone. This in turn has favoured the dollar which has seen a rise. The euro countries are swapping a weaker currency for stronger dollars. While these are shorter duration swaps, on expiry of these swaps, Fed will have to print more dollars. This will deflate the dollars, thus leading to rise in values to hard assets, especially gold.
n With the huge sovereign debt pile up, the issue is likely to remain over the next few years. The value of money is bound to fall. This will in turn increase in the value of gold. Unlike dollars, gold does have a fixed supply. As a long term crisis hedge, gold is excellent.
n When adjusted for inflation, gold still is a cheaper option.
n Generally gold and dollar have an inverse relation. Gold rises, dollar falls and vice versa. However, as seen, dollar and gold both are rising, indicating the breakout of the inverse relationship between the metal and the US currency. This indicates the loss of faith of investors in paper currency. In times of uncertainty, gold seems to be the only safest bet.
n Further, there is no bubble expected to burst in gold as it is driven purely by the demand supply factors. Even there is a dip — due to constantly changing circumstances, it will not be steep.
Hence, it is a good time to buy gold. Don’t go overboard though, but do have an exposure to gold. One can invest in gold directly, invest in a systematic investment plan (monthly purchases) to get the best price either by buying buying gold in physical form like jewellery, gold biscuits, gold bars or investing in gold ETFs. For investors holding gold, continue to hold it as it is likely to go up further long term.
Taxes on
selling gold
There are taxes, which have to be paid at time of sale. Ornaments (made of silver, gold, platinum, precious metal and precious or semi-precious stones) whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel are treated as capital assets.
Long-term or short-term capital gains liability needs to be paid.
Physical form
n Short term: If held for period of less than 36 months, then it is treated as short-term capital asset. The tax rate is 30%. Short-term capital gains can be adjusted against short-term capital losses
n LONG term: If held for period of more than three years, it is treated as long-term capital asset. The investor can claim the cost of acquisition as deduction while calculating capital gains. In the case of long-term capital gains, the indexed cost of acquisition is allowed as deduction. The rate of taxation is 20 per cent. A capital loss can be carried forward for a maximum period of eight years from the assessment year in which the loss was first incurred. There is one per cent wealth tax also chargeable, however, since gold doesn’t fall under the purview of Gift Tax, there are no tax implications.
Gold ETF
The Gold ETF comes under mutual fund. It is taxed as per non-equity mutual fund taxation rules. There is no wealth tax charged on ETF. But investor has to pay taxes after redemption as per the tax laws applicable for non equity mutual fund — long term capital tax of 20 per cent if sold after a year.
Short term tax is 30 per cent. However, there is no wealth tax. But, if it is redeemed for physical gold the taxation rules will be similar to that of physical gold.
The writer is CEO of bankbazaar.com. He can be contacted at adhil.shetty@bankbazaar.com [1]
Links:
[1] mailto:adhil.shetty@bankbazaar.com