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How retailers are reducing gold price pinch? - Views on News from Equitymaster
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  • Aug 30, 2011

    How retailers are reducing gold price pinch?

    The sparkle of gold is increasing by the day as the developed countries continue to grapple with economic slowdown and rising debt woes. While firming price results in value appreciation in all gold forms, making charges and purity issues tend to lower the return value on jewellery. Consequently, gold as an investment in the form of coins & bars is taking precedence over gold as an asset in the form of jewellery.

    During the June 2011 quarter, a 78% jump in investment demand at 108.5 tonnes surged ahead of a 17% rise in jewellery demand at 139.8 tonnes (Source: World Gold Council).

    With the festive season around the corner, jewellery retailers are launching monthly instalment plans to reduce the price pinch and woo consumers back to the jewellery counter. These plans work on the principal of rupee cost averaging employed in case of 'Systematic Investment Plan' (SIP) in mutual funds and protect the investor from price fluctuations.

    Tanishq has launched a two-year scheme, Swarn Nidhi. Under the scheme, the customer has to deposit a minimum of Rs.1,000 or multiples thereof at least once every month. Depending upon the investment, Tanishq in turn will buy the equivalent grammage of gold at the prevailing market price on behalf of the customer and credit it to his account. On maturity, the customer can buy jewellery equal to the accumulated gold value in his account. Thus by monthly averaging, the customer hedges against soaring gold price. This scheme was initially launched in rural India to enable villagers to plan out jewellery purchases but with surging prices, the scheme has been extended to cities. Reliance Jewels plans to launch a similar scheme of one-year tenure allowing investments in fractional quantities of gold every day.

    The benefit of the scheme is illustrated in the example below. In this case, the customer invests an amount of Rs 10,000 when the gold price is on an uptrend. During price correction, the investor increases his monthly contribution to Rs 20,000 to benefit from lower prices and buy more gold. At the end of two years, the customer has invested a total amount of Rs 320,000 and accumulated 121.46 gms of gold at an average price of Rs 2,635 per gm. By redeeming the accumulated gold at the prevailing market price, the customers' corpus for buying jewellery gets enhanced to Rs 343,134 purely on account of rupee averaging. This results in a savings of 12% per annum in jewellery purchases for the customer.

    Gold price averaging scheme
    Instalment Amount invested Gold rate per gm Grams credited
    1 10,000 2,500 4.00
    2 10,000 2,525 3.96
    3 10,000 2,550 3.92
    4 10,000 2,600 3.85
    5 10,000 2,625 3.81
    6 10,000 2,650 3.77
    7 10,000 2,675 3.74
    8 10,000 2,700 3.70
    9 20,000 2,650 7.55
    10 20,000 2,625 7.62
    11 20,000 2,600 7.69
    12 20,000 2,575 7.77
    13 20,000 2,550 7.84
    14 20,000 2,500 8.00
    15 20,000 2,565 7.80
    16 20,000 2,600 7.69
    17 10,000 2,650 3.77
    18 10,000 2,700 3.70
    19 10,000 2,750 3.64
    20 10,000 2,800 3.57
    21 10,000 2,850 3.51
    22 10,000 2,825 3.54
    23 10,000 2,875 3.48
    24 10,000 2,825 3.54
    Total 320,000 2,634.54 121.46
    Redemption value   343,133.65  
    Savings in jewellery purchases   12% p.a  

    Apart from this, Tanishq has monthly deposit scheme "Golden Harvest" under which the investor makes monthly instalments of Rs 500 and multiples thereof for 11/18 months. At the end of the tenure, the last instalment of similar amount is credited to customers’ account by the jewellery retailer after which the accumulated sum can be utilized to buy jewellery.

    These monthly schemes are beneficial in averaging out investments for jewellery purchases particularly in a fluctuating price environment.



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