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Commentary

Old Is Gold But ETFs Are Better Gold

From Prerna Katiyar, in an ET Article:

Unfortunately, most of us think quite like Mr Gupta. That is, if we had purchased gold at, say, Rs 10,000 (per 10 gm) and if today it has touched Rs 13,500, it’s a clear cut 35% gain, no matter from where we bought it and what is the purity level, only to be wronged when we actually go to sell the yellow metal in the market. Gold is trading at an all-time high of $1,000-plus an ounce in the international market and has touched the 13,500-mark in the domestic market. This is encouraging people to liquidate their possessions, just like Mr Gupta. Few jewellers even claim that in the past few months, they have seen more people coming to sell gold rather than buying it.

There are some misconceptions as to buying gold. The common one being that a person wouldn’t be duped by ‘his own’ jeweller just because he has been buying gold from the shop for a long time. Take the case of Ms Anamika Singh who had purchased a gold chain (billed for 22 carat) from their ‘old common’ jeweller in her vicinity. Recently when she got the gold chain’s purity checked by a caratage machine, it was just 18 carat — a loss of 18%, it’s like paying Rs 100 for Rs 82.

According to a Bureau of Indian Standards (BIS) 2006 survey, 90% of non-Hallmarked jewellery failed the purity test. In few instances, the shortage of purity was as high as 45%.

Speak to most of the non-Hallmarked jewellers, and we find that it’s common to deduct anywhere between 10% to as high as 25% from the total market value.

Buying gold at a jeweller (in the form of jewellery) is horrendously irrational. Because:

  • They’ll sell you lower purity than they say.
  • They’ll charge you “making charges”, a substantial sum, plus “wastage”, which is overinflated. [From my experience of selling software to a jeweller]
  • When you want to sell, they’ll buy back only at the lower purity level, and then charge you a further 20% discount.

Buying raw gold must be useful then?

  • If you buy from a jeweller without the BIS mark, you may get impure gold.
  • If you buy BIS marked gold, the jeweller may charge you high costs for buying it back.
  • If you buy from a bank, the bank will NOT buy it back. You then have to go to a jeweller who will charge you big money.
  • And if you buy it, you have to store it somewhere and you have the risk of robbery. Security then costs you some maintenance charge.

This increasingly leads me to believe that buying Gold ETFs is a better thing to do. You can buy and sell very close to the current market price.

How to buy? In your online brokerage site, you can choose the symbol GoldBEES in NSE (there are Kotak, Quantum and Reliance Gold ETFs too) and buy. (You can also tell your broker if you have an offline account) Prices are linked to 1 or 1/2 gram of gold, in rupees.

The underlying gold is stored carefully by the ETF issuer and they take care of security etc. You don’t have to worry about purity, the issuer guarantees it. And if you need to have physical gold, just sell the units and buy gold in the market. The difference is not likely to be much.

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