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The Indian Gold Rush
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Jul 2010
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We are in a seasonally lull period when it comes to gold purchases, especially in India. No major festivals around the corner and the end of another marriage season ensure gold buyers remain at bay.
However, contrary to the earlier statement, I witnessed one of the craziest gold buying frenzy recently!
One large jewellery shop was more packed than a Virar local at 6.00pm. I saw buyers scrambling to even get inside the shop and jumping over each other in an attempt to do so. The shops admin guys along with security were busy outside the shop trying to calm people down and were even issuing tokens to buyers to get inside the shop. There was hardly any place to stand at the counters and the sales people were struggling to entertain customers.
It was because the jewellery shop was offering a bargain - no making charges on gold jewellery.
In the normal course, this making charge tends to be around 8-10% of the total cost. Now, that’s significant!
One thing that immediately caught my attention was what would an 8-10% correction in gold price mean? This was being offered at just one shop, a correction in price would mean a bargain throughout the country. This is what will support prices if there is a meaningful correction.
Yes, the jeweller did come up with the offer of no making charges and thereby giving buyers a reason to buy. But, the poor buyers didn’t know that they were being ‘swindled’ on account of higher gold price being charged.
Let me explain this to you in detail:
The converted gold price (from International spot gold prices and rupee rate plus the duties and taxes), the one used for arriving at real time fair value for Gold ETF was Rs. 1,863.20 for 0.995 purity (24 carat). If you deduct VAT that is included in pricing, you get a one gram price of Rs. 1,844.75.
Gold jewellery is usually made of 22 carat gold, hence you convert the above price to 22 carat, it will be equal to Rs. 1,699.52 per gram.
MCX gold price for the near month contract was Rs. 18,414 per 10 grams. If we convert this price to 22 carat equivalent, it would amount to Rs. 1,696.43 per gram.
But, the jeweller that was offering no making charges was levying a price of Rs. 1,805 per gram for 22 carat gold jewellery.
Comparison of prices: (price per gram for 22 carat gold, excluding VAT charges)
| | Price in Rs. per gram |
| Real time Gold ETF conversion price* | 1,699.52 |
| MCX equivalent price for 22 carat** | 1,696.43 |
| Jewellers price # | 1,805 |
Source: Bloomberg, Industry
* price converted using09th July 2010 (Friday) closing International gold price and rupee rate
** MCX closing price on 10th July 2010 (Saturday) for the August Contract
#Jewellers price on 10th July 2010 (Saturday)
Note: Gold markets and currency markets remain shut on Saturday and Sunday and therefore Fridays closing prices prevail over the weekend.
The jeweller charged more than 6% higher than the actual prevailing price. All those buying gold in form of jewellery 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 jewellers".
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 jeweller 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 jewellery purchased for adornment purposes. Women in India have a high fascination for gold jewellery, as most men might testify, and there’s no other substitute than to buy it from jewellers. 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 jewellery purchases, there are making charges, mark up (profit margins) and also high liquidation charges plus the risk of purity.
So, how does investment in gold via gold jewellery 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 jewellery 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.
Click here to invest in the Quantum Gold Fund ETF
Disclaimer:
The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. 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. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.
Investment Objective: Quantum Gold Fund’s (QGF) investment objective is to generate returns that are in line with the performance of gold and gold related instruments, subject to tracking errors. However, investment in gold related instruments will be made if and when SEBI permits mutual funds to invest in gold related instruments. The Scheme is designed to provide returns that before expenses, closely correspond to the returns provided by gold. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities including derivatives, and the scheme may invest in Money Market Instruments, short term corporate debt securities,CBLO and units of Debt and Liquid Schemes of Mutual Funds to meet liquidity needs. Terms of Issue: QGF is an open-ended Gold Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed. Entry Load: N.A. Exit Load: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF. It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has been cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to market risks. Please read the Scheme Information Document(s) / Key Information Memorandum(s) / Statement of Additional Information / Addendums carefully before investing. Scheme Information Document(s) /Key Information Memorandum(s)/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com / www.QuantumMF.com