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Wednesday, December 26, 2012

Do Gold Jewellery schemes really benefit you?

Gold has always been an integral part of any celebration or festival in India. The rise in the price of the yellow metal is gradually making affordability difficult.

Various companies have come up with gold jewellery schemes to attract buyers. Companies are even offering to pay an installment every year. The customer will own the jewellery after the completion of the tenure.

Example: Mrs Sunita from Delhi wanted to buy 20 grams gold for investment, but she did not have enough money for the purchase. The jeweller offered a scheme under which she could buy the gold jewellery after one year at the prevailing market rate after paying 12 monthly installments. The jeweller also offered to pay the 12th installment after Mrs Sunita pays the 11 installments on time. It means that for jewellery worth Rs 60,000, she will have to pay Rs 55,000 in 11 months, and Rs 5000 will be paid by the jeweller. She thought it was a good option as she anyway wanted to buy the gold for investment.

Benefits of a gold jewellery scheme

The only benefit that a buyer gets in this type of scheme is that he gets to pay in installments. However, a buyer has more to lose than to gain.

Why not to buy gold under the scheme?

The buyer is under an obligation to purchase the gold at the prevailing market rate. If at the time of booking the jewellery, the gold rate is Rs 2,800/g but after the completion of instalments the rate rises to Rs 3,000/g, then buyer has to pay Rs 2,000 extra for every 10 grams due to the change in the price of gold. If the main purpose of a buyer is to invest, then buying jewellery is not a wise choice. The jewellery is not made of 24-carat gold, and it also carries some making charges, so the return value of the jewellery would be much less when compared to gold coin, biscuit or bars.

Below is comparative table which indicate basic difference of buying gold jewellary against gold biscuit or bars.

Other attractive options

The buyers have many other options to buy gold at a cheaper cost and at a better quality.

1. If the buyer wants to buy gold after 12 months under the instalment pattern, then it would be a better option if he buys gold ETF in the stock market every month and averages out the inconsistency.

2. Buyer can also buy gold in e-gold format, where he can purchase as less as 1 gram of the metal. After 12 months, he can sell the gold in electronic form and buy jewellery from the proceedings, or if he wants to hold on to it longer then he can keep it in a demat account.

3. If the buyer wants to invest in a coin or bar, then he also has the option to put the money every month in a recurring deposit account for 12 months and earn interest on the money and buy gold with the maturity proceedings.

The basic flaw in the gold jewellery scheme is that jewellers not only earn interest on the buyer’s instalment but also sell the jewellery after earning a handsome margin. For 20 grams gold jewellery, the jeweller earns Rs 600 making charge and sells 22-carat gold at the rate of 24-carat gold. So he earns approximately 8 per cent extra by selling gold of 22-carat purity.

For the jeweller, this scheme is a win-win situation as he gets the chance to sell his product, and at the same time he earns interest on the customer’s instalment. Buyers, who cannot distinguish whether they are buying gold as jewellery or as an investment, are always set to lose out in this type of deal.