Not a jewel of an investment

You may admire the gleaming rows on display in showrooms, flaunt it at your friend's wedding or simply buy it as a collector's item if you have an eye for exquisite craftsmanship. But is gold jewellery good investment for a chunk of your savings? It isn't, though hordes of people in our country seem to think so.

Last year alone, they bought jewellery for a mind-boggling Rs 1.37 lakh crore. World Gold Council data also shows that during June 2010-11, Indians bought nearly a third of the jewellery sold worldwide. In the last two years, Indian buyers have broken from their longtime habit of watching gold prices like a hawk and swooping in whenever prices fell. Instead, they have bought more jewellery even as gold hit new lifetime highs. That, in turn, has paid off so far, as gold prices shot up 46 per cent in one year.

However, before you convince yourself that buying a 10-sovereign antique Kundan jewellery set is actually a savvy investment move, take a deep breath and resist the impulse. Buying gold through the jewellery route involves a number of hidden costs, which may reduce your ‘returns'. And gold itself may not be a sure-shot bet today. Therefore, if you want to invest in gold, you must first understand the risks. Beware of the following myths:

Myth #1 “Jewellery is the best way to ‘invest' in gold.”

Jewellery may likely be the most pleasurable way to own gold, but it definitely isn't the best form of investment. With any investment, your objective is to incur the least cost and get maximum value. Jewellery purchases in India, however, carry a number of costs that are likely to eat away a significant portion of the ‘return'. To start with, along with the cost of gold you are billed for ‘wastage' and making charges at 10 per cent or more, and precious stones. Two, the gold purity may vary depending on the kind of ornament you buy, as also the standard of the jewellery outlet.

Three, resale of jewellery also entails costs. Even if your jeweller offers to repurchase it, he may not offer you the prevailing gold rate. Charges towards stones and ‘wastage' will inevitably be deducted. Finally, you may not be paid in cash for the jewellery sold and may only be able to use the resale amount to buy new jewellery. Gold prices in recent years have soared rapidly enough to leave jewellery buyers with gains even after writing off all these costs. However, whether this happy state of affairs will persist over the next five or ten years is open to question.

Myth #2 “Gold is liquid, so it is emergency money.”

Gold may have been the most liquid investment during days of barter. But not today, when a host of investments such as stocks, bonds and mutual funds can be bought and sold at the click of a mouse. The problem with gold is that, while everybody recognises its value, few are willing to buy it from you at the prevailing price.

Rather than jewellery, if you buy hallmarked coins or bars from a bank, you are assured on purity, but liquidity remains an issue. Banks only sell and do not buy back gold from retail customers. Mushrooming gold loan companies do offer loans against jewellery but these do not come cheap. Only 60-85 per cent of the jewellery value is offered as loan and the interest charged is 16-20 per cent a year.

Myth #3 “Gold prices will never fall. Therefore, gold investment is as safe as bank deposits.”

Certainly not. Bank deposits give regular interest and your principal is protected by deposit insurance (up to Rs 1 lakh). There are no such guarantees with gold, which doesn't give any regular return; you gain only when gold prices rise. And gold prices, like stocks, are susceptible to the dreaded ‘global cues'.

The impression that gold prices are heading in only one direction – up, is not correct. While gold has broadly trended upward in the last five years, it has also suffered intermittent falls. After hitting a peak in March 2008, following the Lehman crisis gold prices crashed by nearly 33 per cent over the next six months.

The recent surge in gold prices is driven primarily by a strong global demand for jewellery (fuelled partly by Indians!) and limited new goldmine supplies. However, several smaller factors are at work too — investors and funds rushing to buy up gold because it is in a tearing run; speculation in gold due to worries about the global economy; and a mad scramble for a “safe haven”, as other investments like stocks and bonds flounder.

Together, these factors have fuelled gold's 46 per cent jump in one year, but whether they can sustain it is anybody's guess. Gold has already delivered a splendid annual return of 24 per cent over the past five years, thrice that of the Sensex at 8 per cent. That has market commentators worrying about a “gold bubble” in the making.

When you hear ‘bubble' mentioned in markets, it is time to be cautious. The commodity bubble of 2008 and the dotcom bubble of 1999 didn't have a storybook ending for investors. This is why investing a lump-sum or a chunk of your savings in gold at today's prices can entail risk to your capital.

Ultimately, the golden rule appears to be this: If you want to indulge your love for gold, go ahead and buy jewellery. But if you want to make money from it, there are more efficient options.

The golden alternative

Gold does have an important role to play in an investor's portfolio. The most persuasive argument for gold as an investment is that it buys you ‘insurance' against calamities. Gold tends to do well when other traditional investments — stocks or bonds — don't. So, if jewellery isn't a good idea, how else should one invest in gold? The alternatives include…

Gold Exchange Traded Funds (ETFs) offer a fairly cost-efficient way to invest in gold. More than half-a-dozen ETFs are listed on exchanges and all you need is a demat account to buy them. ETF units can be bought just like stocks, by paying a brokerage (usually less than 1 per cent). The ETFs mirror international prices of gold in rupee terms. Each ETF unit usually mirrors the price of one gram of 24 karat gold. Leading ETFs such as Goldman Sachs Gold BEES, UTI Gold ETF and Quantum Gold have delivered a 34 per cent annual return in the last three years.

As ‘returns' from gold depend wholly on the price at which you buy it, timing is important. Gold prices in India track international prices closely but are subject to spikes during the wedding season and other special occasions such as Akshaya Tritiya. To get the best price on gold, buy ahead of, rather than during, these occasions.

Retail investors often lose by placing huge bets on an investment based on its recent returns. While gold may appear a dazzling investment because of its splendid show over the past year, don't go the whole hog on it. As gold does not provide regular income, allocate not more than 10 per cent of your savings to it.

As gold prices can be quite volatile, invest in gold ETFs in instalments. Watching prices closely (as your grandmother probably did!) and buying when they fall remains, as ever, the best option. But if you can't do this, buy a few units every month, so that your costs get evened out.

Gold ETFs allow you to faithfully track gold prices, irrespective of whether they move up or down. A few years down the line, if you want to splurge on jewellery, you can simply cash your gold units and not worry about missed opportunities!

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