[Picture courtesy Nii Noi]
Gold prices are hitting the roof as indicated by the current prices of INR 1909.71 per gram. The www.goldprice.org indicates the movement of the gold.
This may be a decade of increasing gold prices and an amazing CAGR of ~17%. The website accurately describes gold as
Gold has been called a "barometer of fear." When people are anxious about the economy - they turn to gold and bid the price up. Gold has the remarkable ability to store value in both deflationary and inflationary times.
In India, most people invest in gold through jewellery since that has been a traditional and safe method perceived by many households. But in recent times there have been many different means through which you can buy the gold, like gold coins, gold bars, gold ETFs, stocks of gold mining companies etc. As a consumer buying physical gold either in the form of jewellery or in the form of coins/bars is still prevalent over the EFT/Stock route, especially given the household trust over the local jewellers.
I have realized over the period is that buying gold coins is not a profitable proposition compared to buying jewellery or investing in ETFs. The most common mechanism to buy gold coins is either through local jeweller, but apart from that a lot of Indian banks sell gold coins. The Indian post office also sells gold coins and some of the nationwide sellers like Tanishq too sells gold coins.
The problem in buying gold coins are manifold, especially not in terms of buying process but if we look from an investment perspective.
- Buying gold coins from non-reputed jewellers often pose the problem of gold purity. Typically in India you get 24 as well as 22 Carat Gold coins.
- Buying gold coins from reputed banks and post-office incur a premium over the price you may get from local jeweller. The premium reduces your overall investment gain.
- The biggest issue with gold coins is that banks/post-office does not buy back the gold coins and you have to sell it to local jeweller if you wish to en-cash it. The local jeweller will happily buy back your gold coin but with a significant reduction in selling price and sometimes also incurring a “melting” charges which could be totally random depending on jeweller. I have given 1.5-2% as melting charges.
- Another issue is that if you buy gold coins at one local jeweller and try to sell at another (think of re-location) you again will get significantly lower charges. The local jeweller is willing to buy their own gold coins at current selling rate, but impose some or the other charge when the same purity coin is from other jeweller.
- I have also faced the issue that most local jeweller will agree to exchange of gold coins if you are buying some jewellery from their shops, thereby deducting the coin value, but if you want cash, they simply refuse it. Also if some jeweller is willing to pay back in cash, there you have to accept a lower selling price compared to current market price.
- It is also important to be aware of many cheats (including reputed jewellers) who can con you without you even knowing it. Here is a technique, some jeweller provide you with a nice packing of the gold coin (of the size of credit card), mentioning all the relevant details on the packaging. Since you would trust the jeweller and also since you are in a hurry (especially during festival seasons) you would not ask him to remove the gold coin from the packing and weigh it. I had the experience that when I wanted to sell it the jeweller opened the packaging and found it less in weight than what is mentioned.
So if you are looking for investment in gold, I recommend either buying a jeweller (some of the big jewellers are now coming up with no making charges) or to invest in Gold ETF, which are hassle free and more liquid compared to gold coins.