Banks have hit upon a new idea to get a larger share of your wallet – retailing gold. While the banks claim that buying gold from them is a wise decision, we beg to differ. In fact we would go so far as to say that if you want to buy gold, don't go to your bank!
Why Gold?
There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio. Suffice it is to say over here that you must have about 5% of your wealth in gold.
Form of Gold
The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130. So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality.
The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say "biscuits"!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries. There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.
Where to buy Gold?
In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a "neat buck" off you. We will let the numbers speak for themselves.
On the 8th of November, 2006 we called one private sector bank and one jeweller making an enquiry to purchase gold. This is what we got as a response –
| | Bank (Private) | Branded Retailer | Jeweller |
| Purity | 0.999 | 0.999 | 0.999 |
| Price per kilo* (Rs) | 1,071,520 | 1,025,000 | 940,000 |
| % Discount to Pvt Bank Rate | NM | 4.5% | 14.0% |
NM - Not Meaningful
Do not make a judgment as yet. The banks, as their relationship manager will definitely pitch (only if you ask though), give you a certificate assuring you of the purity of the gold. And that's why they charge a premium for the gold. So, on the one hand you get pure gold with a "certificate" and on the other you get just pure gold.
To be able to make a rational decision, let's ascertain the value of the certificate i.e. what benefit it offers you. In case of standard gold bought for the purpose of investment, the benefit which one looks for is whether the seller will buy the gold back or not and, if yes, at what price will he buy it back?
| Gold Bar | Bank (Private) | Branded Retailer | Jeweller |
| Buy back facility | No | Yes | Yes |
| Discount on buy back | NA | NIL | NIL |
Here's an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the Bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!
The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.
The answer to the question of where you should buy gold from is simple – give the banks a skip in case you are looking at buying gold. Opt instead for a credible jeweller (even in the case of jewellers, we found that there is a lot of price variation with branded stores charging a premium – do your homework well before you buy gold). And, of course always buy standard hallmarked gold.
If you do decide to go to a jeweller to buy gold in bulk, do negotiate. It is likely you will get a discount. In our conversations with a couple of brokers, we were offered a discount on bulk purchases.
Beware
Based on our interactions with thousands of individuals every month, we find that instances of mis-selling of investment-related services and products is growing at an alarming rate. As an individual with limited knowledge about such products and services you probably are not geared to ask your advisor the `right' questions. The best way then to eliminate the risk of being `cheated' is probably to spend time in selecting an honest financial planner for yourself.
Even as you take measures to protect yourself from this surge in mis-selling, maybe the banking regulator, the Reserve Bank of India will take note and come to the rescue of millions of ill-informed investors.
