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Things to consider before buying gold

Things to consider before buying gold
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First Published: Thu, May 05 2011. 10 17 PM IST

Shyamal Banerjee/Mint
Shyamal Banerjee/Mint
Updated: Thu, May 05 2011. 10 17 PM IST
On Wednesday, gold reached Rs 22,253 per 10 gram and yet the demand for the yellow metal is expected to remain high today since it’s Akshay Tritiya, when traditionally Hindus buy precious metals, including gold.
However, the demand is expected to remain high in the near term and not just on Friday despite the fact that the price of gold has increased from Rs17,275 to Rs 22,253, by 28.8%, in the last one year. Says Reema Walia Nair, senior research analyst, Angel Commodities Broking Pvt. Ltd, “Gold has seen a downtrend in the last week; this can be used as a good opportunity to buy. Our outlook for gold in the near term is bullish not only for jewellery demand but also for investment demand.”
Shyamal Banerjee/Mint
Gold is gaining popularity as an investment asset for adding value to a portfolio since it has become more accessible and less cumbersome to invest in. However, here’s a word of caution: festive season is a good time to buy gold but ensure that you don’t have too much of it. Says Ranjit Dani, Nagpur-based certified financial planner, “You shouldn’t go overboard on gold. Get your physical gold and jewellery evaluated and ensure that gold is not more than 5-10% of your portfolio.”
If you are planning to buy gold today, here’s all that you should keep in mind.
Purity
The most important parameter while buying gold is to check the purity of the metal. Gold purity is measured in carats or K—24K being the purest form of gold.
Gold ornaments: When you buy gold jewellery, the purity is usually 18-22K; other metals are mixed in it to provide strength to it. If you are buying from a local jeweller, you will have to take his word on purity, but that is not the case with branded jewellers, which certify the purity.
Says Gaurav Bhuwan, marketing head, Tanishq, “All Tanishq jewellery comes with a certificate of authenticity. We also have ‘carat meter’, a machine at every store which will show you the purity.”
One measure to ensure that your gold is pure is to buy hallmark jewellery that is available at all branded stores and even reputed local jewellers. Bureau of Indian Standards (BIS) is the accreditation agency which certifies hallmark gold jewellery and other precious metals in India. Obtaining this certification may mean that you pay a little extra, but its worth the cost since it ensures purity.
Coins and bars: Many banks offer coins and bars of different denominations. Usually banks sell coins and bars of 24K gold that come with a hallmark certificate.
Kotak Mahindra Bank Ltd offers coins of 5 and 8g, while bars in the denomination of 20, 50 and 100g.
Says Surinder Chawla, head, retail liabilities product group, HDFC Bank Ltd says, “Our gold bars are packed in tamper-proof certicards so that it can’t be tampered easily. The 24K gold bars are made in Switzerland and are certified by Assayers appointed by LMBA in the form of ‘Assay Certification’ for the highest quality of gold at 99.99% purity as per international standards.”
You can also buy coins and bars from local shops but again purity may be a concern. At branded stores, you won’t face this problem.
Gold exchange-traded funds (ETFs): This is an option where you don’t have to trouble yourself with purity at all since it is not physical gold. Through gold ETF units, you buy gold electronically in demat form. One unit of gold ETF is typically equivalent to 1g of gold. You need a demat account to buy gold ETFs since it is traded at the stock exchange.
Says Raviprakash Sharma, fund manager, SBI Gold ETF, “Gold ETFs are the most convenient way of buying gold. The purity is not an issue since we hold gold of standard bullion purity of 99.5%.”
E-gold: This is another way to buy gold electronically. It is available with authorized participants of National Spot Exchange Ltd (NSEL), a spot market. You will need to open a trading account with an authorized broker to buy e-gold. Anjani Sinha, managing director and CEO, NSEL, says, “E-gold also lets you convert your paper gold into physical gold. Each unit of e-gold is equivalent to a gram of physical gold.”
Cost
After purity comes the cost parameter. Some options levy a cost for acquiring, while with others you will have to bear the cost of storing.
Gold ornaments: When you buy gold from a local shop, you have to pay making charges. Says Sanjay Shah, KJ Jewellers, Mumbai, “Jewellers usually charge between 8% and 25% of the cost of gold as labour charges. This depends on on the kind of jewellery. The more delicate the piece and intricate the design, the higher would be the making charge.”
Some jewellery brands have a maximum retail price, which usually includes making charges, while other brands charge the current price of gold and making charges.
Coins and bars: There are no separate making charges for coins and bars with banks. While some banks sell these at a slightly higher rate than the market price, some others offer these at special discounts for customers who have a pre-existing relationship with the bank or for online purchases.
Puneet Kapoor, executive vice-president, Kotak Mahindra Bank, says, “We are currently offering our existing gold customers and premium category customers a discount of 3-4.5% on gold coins and bars depending on the denomination.”
As per ICICI Bank Ltd’s website, this Akshay Tritiya the bank is offering a 3.5% discount for online purchase.
Locker cost: For both jewellery and coins and bars, you should ideally have a bank locker for safe storage.
Banks ask you to make a fixed deposit before allotting a locker to you, not to mention the annual charges you need to pay for it.
Gold ETFs: Says Sharma, “The best part about investing in gold ETFs is that there is no making charge. Moreover, you get the real-time prevailing market price of gold.”
But you will have to bear the charges of opening a demat account as well as the brokerage. Here you will also have to pay a fund management fee of 1%.
E-gold: Here too you will have to bear the demat account charges as well as the regular brokerage. When converting paper gold into physical gold, you will also have to bear a charge.
Keep in mind that you can convert paper e-gold into physical gold at select centres of NSEL and some jewellers such as Gitanjali Jewellers.
Ease of sale
Gold ornaments: Selling ornaments is not easy. First, you have to deal with the emotional bit of selling ancestral jewellery if that’s the case. Second, you may not be able to get the prevailing market price while selling, especially at a local shop. Reason: most jewellers will deduct 10-15% from the value of gold.
Also, if you don’t have a receipt for the jewellery or sell the gold at a shop you haven’t purchased the gold from, you get a slightly lower price.
For all you know, at the time of buying you may not have got pure gold, but while selling the jewellers check the purity.
Coins and bars: While you can buy coins and gold at a local shop or bank, banks do not buy back. Kapoor says, “As per the Reserve Bank of India guidelines, banks are permitted to be retail sellers of gold, but can’t buy back gold.”
The local shop or even branded shops will buy back the gold they sold to you. So make sure you save the receipts. Some branded jewellers may not buy back gold, but let you exchange it for a different ornament or coin. So do check the policy of the branded jeweller.
Gold ETFs: Selling gold ETFs is easier than any other form of gold. All you need to do is place a sell request with your broker.
E-gold: Just like gold ETFs, you can ask your broker to sell units.
Others
Tax treatment: An important parameter to look into is the tax you need to pay when you sell gold. Says Jayant Pai, Mumbai-based certified financial planner, “With gold ETFs you will pay 10% as long-term capital gains tax if you sell the units after one year. If you sell within one year, you will have to pay a short-term capital gains tax according to your tax slab. In case of physical gold, you will need to pay wealth tax at 1% in case the total taxable wealth is at least Rs 15 lakh.”
Loans: As far as getting loans goes, you can avail a loan against gold ornaments. A few banks give loans against gold bars and coins. You can also pledge Gold ETF as well as e-gold units for a loan.
Now take the pick that suits you best.
bindisha.s@livemint.com
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First Published: Thu, May 05 2011. 10 17 PM IST