The Indian Gold Rush

Jul 17, 2010

The jeweler charged more than 6% higher than the actual prevailing price. All those buying gold in form of jewelry lost the moment they bought it. Knowing and tracking gold price closely, I questioned the sales person "Why are you charging such a high price?"

His answer was: "It's not higher; this is the price of gold. This is the price that we charge and you would find a similar price across all the jewelers".

Luckily, being in the gold market, I knew what the right price of Gold is.

The Confession
Even I was one of those who bought from that jeweler during the offer. It was out of compulsion following a cultural tradition driving the purchase.

Please do not take us wrong. Indeed there's no alternative to buying jewelry purchased for adornment purposes. Women in India have a high fascination for gold jewelry, as most men might testify, and there's no other substitute than to buy it from jewelers. Investors need to recognize the fact that there is a difference between buying gold for ornamental value, and buying gold as an investment.

Exercise prudence while investing
Owning gold is very important, and desirable, for all investors. But the ‘golden' question is - how should one invest in gold? The facts say that most of the investment in gold in India is in the form of jewellery. But that is not the best way to invest in gold.

As discussed above, when investing in gold through jewelry purchases, there are making charges, mark up (profit margins) and also high liquidation charges plus the risk of purity.

So, what does investment in gold via gold jewelry purchase sum up to?

10% making charges, 6-10% margins (on gold value), 5% liquidation charges (melting charges levied while selling back) and doubtful quality!

Would you ever invest in a mutual fund which charges 15-20% entry load, 5% exit load, and whose quality of investments is doubtful?

Of course not! The same way, investing in gold in the form of jewellery is not wise. In fact, it is probably the worst way to invest in gold due to the reasons discussed above.

Earlier, there were gold import controls that restricted holding gold in other forms forcing people to buy gold in jewelry as a mode of investment.

But, now the sector has been opened up, Indian prices move in sync with international prices and there are better options like Gold ETFs available for investments.

So, dear reader, please remember to purchase Gold ETF's for investments and jewellery for ornamental purposes only.

Disclaimer:
The Golden Truth is authored by Chirag Mehta. Chirag is Fund Manager - Commodities at Quantum Mutual Fund. Views expressed in this article are entirely those of the author and should not be regarded as views of Quantum Mutual Fund, Quantum Asset Management Company Private Limited and Equitymaster. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Equitymaster has not verified the facts contained in this column and it does not accept any responsibility for the same. Please read the detailed Terms of Use of the web site.