With an increase in inflation, investors tend to turn to investment options such as gold to hedge themselves. As prices in the U.S. climbed 6.2% year-over-year, the largest increase since November 1990, it could be a good time to evaluate how you can save money when considering investments in gold.
There are three ways in which you can earn more returns on gold transactions:
1. Investment Transaction: Increasing the Returns by Earning Passive Income
To understand how to save money, we need to first understand where we are spending more. In India, it is a common practice to buy gold coins on various auspicious occasions like Dhanteras, Diwali, etc. It’s a great practice as it keeps increasing the investments, but now let’s see how we end up spending excess & reducing the return.
Let us compare two scenarios, one wherein our investor friend, Mr A buys a gold coin of 1 gram, the other where he chooses sovereign gold bonds (SGBs) as an option for the same quantity.
Gold Coin : With gold coin, the investment cost of INR 5,000/gm also attracts making charges of say at minimum, INR 100 per gram along with 3% GST and the total cost thus becomes INR 5,253. This simply means, Mr A paid 5.06% in addition to the actual cost.
SGB investment: SGBs in layman terms, are bonds issued by the RBI, but the variation being the underlying here is gold. This product just as normal bonds offer interest. The important point is, the interest becomes a passive source of income, in addition to the increase in the gold’s price.
Thus Mr A here, would pay INR 5,000 and the brokerage charges, which would be, considering the maximum cost, 1% of the investment value. The interest that he would earn would be 2.5% pa on the face value of the investment. Thus, the actual cost becomes INR 5,050 also attracting the lucrative 2.5% interest which he otherwise wouldn’t earn.
The choice here becomes clear, the cost of investment in the first option would take around more than half a year to recover considering the average compound annual growth rate of 10% in a span of 30 years, whereas our SGB investment starts yielding returns in the very year of buying it.
2. Investment Transaction: Increasing the Returns by Saving on Costs
Here the understanding of savings needs a deeper understanding of how the demand and supply market works along with a detailed analysis of the face value and investment value returns.
To understand this down, evaluate these points:
- Low volumes, attractive prices: The first SGB was launched in 2015 and even today, the awareness of the product is very low. Hence the volumes for secondary sale, on the exchanges are very low and sellers are ready to sell at a discounted price. This discount can be up to 5% on comparison to the spot price of gold. So, investors can take advantage of the situation and buy gold at a discount, and hence increase their return.
- High face value, at low investment cost earns higher returns: The bonds are issued at a predetermined price. This price is the face value of the bond, and interest is calculated on the face value of the bond. Investment price, on the other hand, is the price for which we can buy it today, it is influenced by the current market prices.
The investors should thus, consider buying SGBs from a tranche which was issued at a high face value and is now trading at low prices. For example, suppose a SGB was issued at the price of INR 5,300/per unit. The interest amount is fixed at 2.5% of the face value INR 5,300 and the same tranche is trading at INR 4,800/per unit.
As the interest is fixed but our investment cost was lower, the interest rate calculated on our investment value gives an effective interest rate of 2.76% p.a. We achieve two goals here, reduced cost, higher returns. But note, this is only possible if the SGB is trading below the issue price.
3. Loan Transactions: The Savings Due to Gold Loans
Businessmen usually need working capital to run their business, but to avail a working capital loan one requires a good credit score. It thus becomes out of reach for the small vendors who want to run their business smoothly, which ends up turning them towards gold loans. Moreover, the cost of working capital loans is very high. Also, generally salaried people usually have a decent credit history, but that leaves them with options like personal loans at times of crisis.
Historically, gold loans have been a preferred loan for Indians in the time of crisis not only for individuals but also to support businesses. This is because while giving a gold loan, the banks don’t take the creditworthiness of the customer into a detailed consideration because the loan is secured against the gold pledged.
Let us understand why a gold loan is preferred and then elaborate on the saving options therein:
Working capital loans cost 15% to the pocket, and personal loans can range at interest rates of 15-18%, which is too high an interest burden to bear. The interest rate on gold loans comparatively, falls in the range of 8-9% which is cheaper and with less focus on the credit history, a feasible option.
Reducing the effective rate of interest with the help of SGBs:
Let’s bring Mr A back into the picture: He is a manufacturer and he, knowing the cost effectiveness, regularly takes gold loans for his working capital requirements.
He has two options at hand: one pledge jewelry and the other pledge SGBs.
- Pledge Gold Jewelry: He has specifically allocated a portion of his jewelry for the loan purpose. He pledges gold jewelry of INR 5 lakh and takes a gold loan, first the hair cut of around 10% will be deducted from the value of gold, and then 65% of that will be given as loan. Thus, the loan amount is INR 2,92,500. This is because of concerns like purity and prospective price fluctuations. Additionally, a processing fees of minimum 0.5% will be charged
Now if the loan is for a tenure of 1 year and interest rate is 10%, Mr A will have to return INR 3,21,750 at the end of the year.
- Pledge SBG : SGBs which are stored in his de-mat account are pledged here. He will get loan at a flat hair cut of 35%, because there are no concerns about the purity of SGBs. So now the loan amount will be INR 3,25,000. Processing fees would also be charged here. Now because, in this scenario Mr A has SBGs, he is entitled to get the interest on the SGBs, even though he has taken loan against it. Hence, Mr A will get 2.5% interest on INR 5 lakh i.e. INR 12,500 from RBI. Now after a year Mr A will have to return INR 3,25,000+10%, that is INR 3,57,500.
To summarize the example:
So, in the SGB scenario Mr A saved INR 9,087.5. In addition to that, he got the benefit of an excess funds of INR 32,500 which support the working capital, strengthening it for better business opportunities. In the SGB scenario the cost of loan can be reduced further if the effective rate of interest from SGBs is increased, as discussed in the investment transactions, saving the cost analysis.
Thus, gold in the SGB form proves lucrative as an investment option than traditional forms of gold and can help you save while making an investment in gold.
Bukele steps up El Salvador’s bet on sliding bitcoin; buys another 150 coins
El Salvador President Nayib Bukele said the Central American country had acquired an additional 150 bitcoins after the digital currency’s value slumped again, enlarging his bet on the cryptocurrency despite criticism.
Bitcoin, the world’s biggest and best-known cryptocurrency, is down about 30% from the year’s high of $69,000 on Nov. 10. Bukele said last week that El Salvador had acquired 100 additional coins to take advantage of the currency weakening.
Late on Friday, Bukele announced the government had stepped into the market again.
“El Salvador just bought the dip! 150 coins at an average USD price of ~$48,670,” Bukele wrote on Twitter.
Until Nov. 26, El Salvador had 1,220 bitcoins.
In September El Salvador became the world’s first nation to adopt bitcoin as legal tender, a move that generated global media attention but also attracted criticism from the opposition and foreign financial institutions.
The International Monetary Fund (IMF) said on Monday that El Salvador should not use bitcoin as legal tender, considering risks related to the cryptocurrency.
(Reporting by Nelson Renteria; Writing by Drazen Jorgic; Editing by Daniel Wallis)
Trump's Media Company to Get $1 Billion in Investment From SPAC – Bloomberg
Former President Donald Trump’s media company said Digital World Acquisition Corp. has agreed to a $1 billion investment following the combination of both companies.
Trump first announced the plan to merge with the so-called blank-check firm in October that would help enable him to regain a social media presence after he was kicked off Twitter Inc. and Facebook Inc. platforms. The new enterprise will be in operation by the first quarter of 2022 and plans to start a social media company called Truth Social.
Gold Is a Green Investment. Owning it Can Be Tricky. – Barron's
Most investors don’t think of gold as a sustainable investment. Historically, it has required large amounts of water, energy and toxic chemicals to mine and refine. Mining companies have been accused of exploiting developing countries and their workers.
Yet gold bullion—as opposed to miners—is surprisingly green. Once fashioned into bars, it just sits in vaults, having virtually no carbon footprint. According to the World Gold Council, there are 201,296 metric tons of previously mined gold in storage. https://www.gold.org/goldhub/data/above-ground-stocks Gold miners increase that stock by just 1.5% a year—3,000 tons.
Two money managers,
and Sprott Asset Management, recently filed with regulators to launch the Franklin Responsibly Sourced Gold https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/rule-filings/filings/2021/SR-NYSEArca-2021-73%20Pdf.pdf and the Sprott ESG Gold https://www.sec.gov/rules/sro/nysearca/2021/34-92506.pdf exchange-traded funds.
According to its filing, the Franklin ETF will seek “to predominantly hold responsibly sourced gold bullion, defined as London Good Delivery gold bullion bars produced after January 2012 in accordance with London Bullion Market Association’s Responsible Gold Guidance.” https://www.lbma.org.uk/responsible-sourcing/guidance-documents The Sprott one seeks to buy gold from miners that meet its proprietary environmental, social and governance criteria in addition to market association approval.
Neither Sprott nor Franklin Templeton were available to speak while seeking regulatory approval.
The London bullion association’s 2012 Responsible Gold Guidance required gold to be sourced from refiners not linked to human rights abuses or armed groups, i.e., “conflict gold.” The association’s standards have evolved since then to include environmental criteria. Still, gold sourced after 2012 before those criteria were added could come from dirtier sources.
A 2021 open-letter https://www.globalwitness.org/en/press-releases/open-letter-lbma-concerns-responsible-sourcing-programme-fails-curtail-human-rights-abuse-and-illicit-gold-supply-chain/signed by five human rights groups said “downstream customers cannot have confidence that the LBMA’s Good Delivery gold is free of human rights abuses and not linked to conflict.”
The association responded to these accusations with its own open letter, https://www.lbma.org.uk/articles/lbma-responds-to-ngo-open-letter-on-responsible-sourcing stating that it “recognizes the challenges that all audit programs face, and whilst no program is perfect, we remain committed to continuous improvements, and ongoing engagement with stakeholders in addressing the supply-chain risks.”
The new Sprott ETF should have a higher standard for sourcing gold because of its unique ESG criteria. But its regulatory filing acknowledges that it may not be able to find enough ESG-approved gold, so that the trust expects to hold some amount of unallocated [i.e., non-ESG approved] gold at any given point in time.”
All of which is to say these new ETFs may not be much greener than traditional bullion ones.
Yet gold’s carbon advantages are real. According to one study https://www.gold.org/goldhub/research/gold-and-climate-change-decarbonising-investment-portfolios by climate-risk analysis firm Urgentem, for a portfolio of 70% equities and 30% bonds, introducing a 10% allocation to gold (and reducing the other asset holdings by equal amounts) reduced portfolio carbon emissions intensity by 7%, while a 20% gold allocation lowered it by 17%.
“The emissions associated with holding gold are frankly a lot less than holding equities,” says Terry Heymann, CFO of gold trade-group World Gold Council.
While bullion as a low-carbon investment makes sense, Heymann posits that the mining industry is also becoming ESG-friendly, pointing to the World Gold Council’s 2019 publishing of its Responsible Gold Mining Principles https://www.gold.org/about-gold/gold-supply/responsible-gold/responsible-gold-mining-principles, which the Council’s 33 member companies—including the world’s largest miners—have all committed to following. The principles support the Paris Climate Accord’s goal of producing zero carbon emissions by 2050.
“You’re going to see a lot more use of renewables [at mines]— solar, hydro, or wind,” Heymann says. “Secondly, you’re going to see a move towards electric vehicles.” He points to miner Newmont’s (NEM) “all-electric mine” in Northern Ontario, https://mining.ca/mining-stories/goldcorp-electric/ which has a fleet of battery-powered trucks as an example of the industry’s future.
Yet miners have a long way to go to convince ESG experts. The differences between bullion and mining stocks are “night and day,” says Adam Strauss, co-manager of Appleseed (APPLX), an ESG-focused fund which has 7% of its portfolio in the
Sprott Physical Gold Trust
(PHYS). “Gold mining is a very dirty business.”
A 2020 report by the Columbia Center on Sustainable Development and the Responsible Mining Foundation called the mining industry’s efforts to achieve its sustainable development goals so far “cosmetic.” https://www.responsibleminingfoundation.org/app/uploads/RMF_CCSI_Mining_and_SDGs_EN_Sept2020.pdf Although she acknowledges individual miners differ, Perrine Toledano, the CCSI’s mining analyst, says that some miners “just cherry-pick the [sustainable goal] they want and then communicate on its positive impact.”
Could an ESG ETF tracking just the 33 World Gold Council member companies that have agreed to its principles be sustainable? Sustainalytics, one of the largest ESG ratings services, gives mixed grades to different members, calling the ESG-risk of Chinese miner Zijin Mining Group “Severe,” and rating it one of the worst companies in its entire coverage universe.
That said, those ratings could improve in time. “Every single one of our members is committed to implement the responsible gold mining principles, and I know that work is under way,” says Heymann. “We’ve got four members in China, and they’re all committed to doing this.” This March, Zijin issued a release regarding its “ESG Report to emphasize Sustainable Development,”stating it continues “to improve our ESG performance in environmental and ecological protection, human rights protection, anticorruption, responsible supply chain and community engagement.” and that it invested 1.92 billion renminbi in 2020, a 51% increase over 2019, on environmental protection.
“Having some sort of [ESG] guidance is very positive,” Sustaianlytics mining analyst Dana Sasarean says about the Council’s principles. “If the world requires gold, I think it’s important to make sure that this gold is produced in the most responsible way. But there are challenges.”
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Bukele steps up El Salvador’s bet on sliding bitcoin; buys another 150 coins
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