The Gold Rush in India

Posted On Tuesday, Jul 20, 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.



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. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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