Planning gold purchases for a future occassion

by Manshu on March 20, 2011

in Investments

Amit left the following comment a few days ago:

I want to buy gold for my sisters marriage which will be in december 2012.
So i am planning to buy gold(in solid form) for making jewellery for her wedding.
Please let me know which month is the best to buy gold in solid form.

Before I could get to the answer – Niraj Kothari replied to it in a very comprehensive manner, and I think his response has some good insight for people who are planning to purchase gold in the near future for a wedding or some other occasion, so I’m bumping it up to a full post.

Even if you’re not planning to buy gold – this is a good thing to be aware of.

Dear Amit,

First of all, it is highly unpredictable to say in which month the gold rate will be lesser/ optimal so that you can buy buy pure gold .

I suggest you the below options by which I hope that you can take advantage of current high gold rate fluctuations and also get some benefit from jewellers schemes

1. You can go with monthly savings scheme / monthly fixed amount investment scheme with reputed jewellers in your city, the advantages of such type of schemes are

a. These monthly fixed amount investment schemes give you a bonus amount at the end of the     scheme.
Ex: Deposit Rs.5000 / month for 13 months and get a bonus of Rs.5000 at the end of 14th month , so you will be benefitted to buy gold worth Rs.70000/- though you have deposited Rs.65000/- in total for 13 months.

b. These schemes have some discount on the making charges*
* The discount should be taken in written on the day when you start the scheme.

c. Usually the gold price is taken on the final day on which you purchase the jewellery.

d. Make sure that whether the jeweller is offering the bonus only on purchase of gold jewellery or also on purchase of on gold bullion( 24kt gold ).

e. The jewellery which you purchase should be all BIS 916 hallmarked on every product.
Ex: If you buy a 6 piece bangle set, EACH BANGLE should be 916 BIS hallmarked for 22kt gold and 958 Bis hallmarked for 23kt Gold.

2. You must have decided how many grams of gold jewellery you are planning to buy for your sisters marriage, so for Example , If I assume it to be 200 grams and you 20 more months in hand.
So, you can buy just 10.000 grams 24kt pure gold of 99.50 purity or above every month on a fixed date , this way you will make an average price at which you buy gold and also it won’t overload your investment portfolio/monthly budget.

At the end of Nov.2012 you will accumulate 200.00 grams of 24kt gold, now when you go to a jeweller to exchange this 22kt gold jewellery , make sure of the below mentioned points.

a. Your 24kt gold should be converted in cash at that day’s prevailing 24kt gold purchase rate of the jeweller.( Rs.100 – Rs.300 / 10 grams is difference between sale and purchase price of 24kt gold at reputed jewellers )

b. You pay ornament rate + making charges to the jeweller for the jewellery you purchase , in this total amount your 24kt gold total value should be deducted.

c. Again make sure you buy in Bill/ and all the jewellery is 916 BIS hallmarked.

Hope the above information is useful to you…

I think there is value in exploring this option not so much because of the math of it but because of the psychological benefit of setting aside a certain sum every month for a very specific purpose with a jeweler. If you decide to get into a scheme with a jeweler where you invest a sum regularly to get a bonus at the end, then make sure to compare that with at least a bank recurring deposit, and see that it’s not too far off.

Be it stocks or other assets – regular investing is likely to trump timing the market as far as the retail investor is concerned.

Finally – thank you to Niraj for sharing his experience with everyone.

{ 12 comments… read them below or add one }

Salil A March 21, 2011 at 5:54 am

Hi,

I understand that an SIP/Averaging type of approach is most recommended in such situations and the solution provided does have benefits in terms of ensuring discipline and achievement of the goal at a decent cost.

1. How does the loan with jeweller approach compare to the Gold ETF SIP (apart from the bonus for 1 month)? Can we compare the charges?
2. Also would a Gold ETF have lesser counterparty risk compared to a Gold Jeweller?
3. In terms of tax are there any short term capital gains taxes regarding ETF’s?

Since I have never invested in any ETF I am just curious to know if this approach has any other benefits/drawbacks?

Thanks,
Salil A

Reply

Manshu March 21, 2011 at 6:45 am

I get the impression from your question that you’re talking about taking a loan and then investing it?

I don’t think that is a good strategy, but I might be totally off. If not then here are the answers t other questions.

1. GOLDBEES has an annual expense of 1%. I don’t know if the jeweler will charge you anything that can be compared with expenses.

2. Yes, I’d expect that to be lesser.

3. Yes, ETFs are chargeable under short term capital gains.

As it stands today, a lot of people are wary of investing in what they call paper gold, and a systematic scheme with a jeweler just opens another option to investigate.

The biggest takeaway from this post is to think about regular investing, and be aware of this additional option. Trying to look for * best* months for investing in gold is just like trying to time the stock market.

Reply

Hari March 21, 2011 at 8:52 am

Regarding the jewellery shops scheme.
They generally have a scheme whereby you are required to put in some money say Rs. 5000 for say 11 months. Then, at the end of 11 months they add a bonus of 1 months pay to it. So, at the end of 12 months you have Rs. 60,000/-.
Now the gold that you can redeem is for Rs. 60,000/- based on the closing price of gold on the date of redemption.
It is important to note that any increase in gold prices at the time of redemption would adversely affect your gold holdings at the end of 12 months. Thus, say if at the month of your redemption if gold prices shots up then, your gold in hand would reduce.
Besides, you cannot withdraw the amount what you have deposited with the particular jeweller apart from purchasing jewellery. And also, some jewellers also put a restriction on what you can purchase from such amount.

Reply

Manshu March 21, 2011 at 10:23 am

That’s an excellent point. Essentially, by depositing money with a jeweler you’re saving regularly for buying gold, but aren’t necessarily locking onto a price every month, so expose yourself to an increased gold price at the end of the time period.

Reply

Prasad August 3, 2011 at 8:42 pm

Hi,
Can you please help me to understand the different charges applicable to Gold ETF and EGold. And also suggest which the better option between Gold ETF and Egold.
Thanks

Reply

Manshu August 5, 2011 at 4:03 pm

Gold ETF charges expenses Prasad which is about 1% annually. I’m not sure how EGold charges expenses or make money – not aware of that aspect of them.

Reply

Paresh July 11, 2012 at 8:31 am

There are no separate charges for e-gold. But you need to pay brokerage (which is also payable at ETFs) / annual account maintainance charges which can vary between 250-400 per annum from DP to DP.
If you ask me,e-gold is better for longer term perspective.At NSEL, you are directly buying the gold while at ETF respective fund is buying gold on behalf of you where delivery is possible for high value holders only.

Reply

Ramesh October 12, 2011 at 6:49 pm

if I wish to sell a gold coin to A jeweler which one is likely to fetch a better price or would be easier to sell at same price.

A. Coin purchased from same jeWeller with a receipt

B coin purchased from another jeweler

C. Coin purchased from ICICI Bank

d. American Eagle coin./American bufalow coin

Let us presume that weight and purity is exactly same.

Reply

Manshu October 13, 2011 at 5:14 am

That’s a very good question, which is code to say I don’t know the answer 🙂

Reply

Rehaan Hassan January 25, 2012 at 8:02 am

Generally the jewellers sell gold jewellery at a price of 24 karat. Suppose today’s price is 27500 per 10grams, here jewellers in kolkata takes this price and sells 22karat or 22/22karat jewellery plus includes vat, making charges, hallmark charges with it.
1.) Is this system is maintained every where in India.
2.) If we sells gold to purchase jewellery, they first redeemed it into rupees then they sells jewellery of that amount. So 100grams of solid gold of 24karat at a price of 27500 per 10grams only fetches 275000rupees and we can able to buy only 90grams of 22/22 grams hallmark jewellery , which is a loss to us. So please suggest on this matter.

Reply

Nataraj July 11, 2012 at 7:07 am

Dear Manshu,

1. There are jewelers who buy gold on your account on the day of the payment, and credit gold into your account….CKC in Bangalore…this would be better then money accumulation.
2. if you are not sure, about from where you would buy, or the surplus amount, I suggest National Spot Exchange, NSEL’s e-Gold….wherein you can invest in multiple of 1 gm any day….at the end you can redeem the money or gold….
3. another big advantage of e-gold is that you could carry this for long periods of time…but account opening and other formalities are painful.

Reply

Rehaan Hassan August 15, 2012 at 7:56 pm

The jewellers sell gold jewellery at a price of daily 24 karat gold price. Suppose today’s price of 24 karat is 29500 per 10grams, here jewellers in kolkata tags this price of 24karat as selling price for 22karat and sells 22karat jewellery (or for 22/22karat hallmark jewellery plus hallmark charges with it) including vat and making charges extra.
1.) Is this system is maintained every where in India.
2.) If we sells gold to purchase jewellery, they first redeemed it into rupees then they sells jewellery of that amount. So 100grams of solid gold 24karat at a price of 29500 per 10grams only fetches 295000 rupees and for with this we can able to buy only 90grams of 22/22 grams hallmark jewellery, since they consider the price of 24karat raw gold for 22karat jewellery. So in exchange of 100grams of 24karat gold the jewellers only offers us 90-92grams of gold jewellery which is a loss to us. So please suggest on this matter.

Reply

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