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Showing posts with label Investing in Gold. Show all posts
Showing posts with label Investing in Gold. Show all posts

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.

Wednesday, November 3, 2010

Sensex Outperforms Gold in Last One Year

On Dhanteras today, you might bought gold like thousands of other Indians. But would it make you wealthier than other investments?

Not necessarily, if you look at recent history.

Of course, it all rests on the timing. Even though there have been many headlines about how high the gold price has risen, you would have become wealthier had you bought Indian stocks or equities a year ago compared with gold.

The Bombay Stock Exchange's 30-share Sensitive Index has gained 32% in the 52 weeks through Tuesday, while gold's spot price in rupee terms is up 23%, according to the Bombay Bullion Association.

India's stock market has benefited from large investments by foreign investors, who have been looking for high-performing stock markets around the world. They find India attractive, thanks to its projected annual economic growth rate of more than 8% and fast-growing companies. So far this year, foreign institutional investors have poured $24.5 billion into Indian stocks.

However, it has not all been smooth sailing. In the early months of this year, for instance, some large investors got jittery and pulled money out of Indian stocks, causing the Sensex to fall. They came back several weeks later, leading to gains.

In contrast, gold prices have been relatively less volatile.

But like stocks, gold prices, too, have been dependent on foreign investors. The physical demand for gold, for use in industries or jewelry, has not jumped in recent years.

Instead, large investors in the U.S. and in other parts of the world are hoarding gold because they are worried that there could be another economic setback in America or other European countries. In such a scenario, stocks could lose value and gold typically gains value because it's considered a "safe" investment and a currency of last resort.

Also, in the last few years, central banks around the world have printed a lot of new money, some of which has been used by investors to buy gold. This all has pushed up the gold price.

So, where should you invest your money now?

In both stocks and gold, though in varying degrees and with different goals.

Buy stocks for growth over the long-term but be prepared for volatility. We believe that the Indian stock market will continue to do well over the next several years as Indian companies continue to grow rapidly. Decades of bull market has been already been experienced by developed countries like US and Japan. For India, this could be an start of multi years bull run. 

We expects that profits of Indian companies could grow by more than 20% a year in the near future. Stocks could deliver more than 15% per annum over the next few years on the back of strong corporate earnings growth.

Typically, stocks should form a major part of an investor's portfolio – between 50% and 65% of your investments if you can handle moderate risk.

Gold, on the other hand, has not been a high-return investment over the long-term but it can protect a portfolio from massive losses over periods of time.

Given that fears about the global economy still abound, if global markets collapse or stocks lose value for another reason, typically gold will gain. This is what happened in 2008 when stocks fell by around 50% but gold gained in value.

We suggest that individuals put around 10% to 20% of their portfolio in gold, typically through gold exchange-traded funds, a type of fund which trades like a stock. Gold ETFs aim to track the daily spot price of gold and ETF providers use your investment to buy equivalent gold and keep it with a bank or custodian.