Buy gold for cheaper with this zaveri bazaar hack

When you buy something for less than everyone else, you guarantee yourself higher profits. But buying cheap is not the only objective here. You must buy the purest form of gold to ensure you get a fair value when selling it. The lower the purity, the bigger the discount.

The biggest mistake people make is to buy gold from their friendly neighbourhood bank. There are many drawbacks to this. For one, banks charge more than others for the gold coins they sell. Sure, the purity is never in doubt, but you will find their logos embossed on the bullion to be a major challenge.

You see, banks in India are not allowed to buy back gold from their customers. That means you will need to visit a jeweller to sell any gold you bought from a bank. The bank logos embossed on the coins will hinder sales unless you agree to have them melted. You'll have to pay the melting and remaking charges yourself.

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I also include large institutional and branded sellers such as MMTC Pamp, Tanishq and others in the list of sources that serious investors should avoid.

Zaveri bazaars: A buyer’s paradise

Every city in India has a market that’s dominated by jewellers, called a zaveri bazaar.

These markets are interesting places to visit even if you are not interested in buying bullion. Since they’re frequented by the affluent, you will invariably see top-notch products, from eateries to footwear, on sale in the vicinity.

The trick to buying the purest quality gold at an honest price is to buy from a wholesaler, preferably one who has his own smelter and import licence. These sellers offer you the finest rates and the best buy-back prices, too.

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I learnt a lot about trade and commerce from my dad’s conversations with his business colleagues during our customary Sunday lunches. These are lessons that no Ivy League college can teach a budding businessman. The most important lesson was: never get into a business deal unless you have an exit plan. Without this, you are nothing but fodder for bigger sharks. The zaveri bazaar wholesaler offers you a narrow spread (tiny difference between selling and buying price) to liquidate your gold investments at the drop of a hat – provided you only sell gold you had bought from him, as this saves him from spending on purity tests.

This is the single biggest advantage in buying gold from a zaveri bazaar rather than a bank.

Form factor

You can invest in various forms of gold. Jewellery is the most expensive of these. Unfortunately, it also accounts for most of the gold held in India. At the risk of sounding like a person only cares about the bottom line, this is cost-inefficient. You can never have 24-carat jewellery as the gold would be too soft. As I said earlier, the lower the purity, the bigger the discount. In addition to the lower resale price, you wind up paying making charges, which can set you back anywhere from 6-14%.

This is like carrying water in a sieve – you’ll be lucky if half of it remains by the time you reach your destination. Therefore gold jewellery (like diamonds) is most profitable when one generation passes it on to the next. Price appreciation over the decades makes the 6-14% loss palatable.

The most efficient way to invest in gold

The most efficient way to invest in gold is to buy uneven rods (‘lagdi’, from the Hindi word lakdi, meaning stick), gold bars (‘Cadbury’ in jewellers parlance) or minted coins, in that order Here’s the logic behind each of these.

Uneven “lagdi" rods: Imagine pouring a thick puree of mashed bananas into a tall glass. Or eating kulfi that’s set in long, cylindrical containers. In both cases you are going to get an uneven product. Possibly, no two pieces will weigh the same. The time, effort and cost of making such handmade products tend to be minimal.

That is how uneven gold ‘lagdi’ rods are made, too. Their weights are usually in fractions rather than round numbers. But in terms of buying and selling, these offer the greatest convenience, highest profits and lowest leakage.

Here's what they look like.

Veteran stock market investors will remember how ‘odd lots’ of shares used to be available at a discount of about 10% to market prices. That was in the era of physical share certificates, when lot sizes were in multiples of 50.

Investors with deep pockets mopped up as many odd lots as they could and consolidated them into regular market lots. The share transfer took anywhere from 4 to 12 weeks, but the 10% cost advantage helped them make a killing.

‘Cadbury’ bars: These are beautiful, machine-cut bars of various denominations and weights (see picture below). Their weights are round numbers to ensure uniformity. The nickname Cadbury comes from the resemblance to a chocolate bar wrapped in foil.

More often than not they are embossed with the logo of the seller and the weight, purity and hallmarking. As with gold bought from a bank, embossed logos mean melting charge, unless you sell to the same person you bought from. The seller knows this, so the spread is slightly wider than that of lagdis.

Coins: These are the least lucrative investment, if you are a hair-splitting, return-conscious investor like me. Their relatively small size and weight means the minimum making charges per coin makes them more expensive per gram than lagdis or Cadbury bars. They are undoubtedly beautiful and make for excellent gifts, so they sell the most during the festive and wedding seasons.

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They are available in buyer-friendly sizes starting from 1 gram. Some wholesalers may sell coins in fractions of a gram, too. These are embossed with a logo, in addition to weight, purity and hallmarking stamps. The buy-sell spread tends to be the widest with coins – after hand-crafted jewellery, that is.

What about e-gold?

Gold held in electronic format is available easily through exchange traded funds (ETFs). Various fund houses have floated ETFs that are backed by physical gold vested with a custodian. The liquidity they offer allows you to buy and sell large amounts of gold in seconds. But I much prefer physical gold over electronic gold. Here’s why.

Recurring expenses: ETFs are floated by fund houses, which have various “enterprise expenses". I am yet to be fully convinced about why I should pay for these.

Custodial charges: Since gold ETFs have to be backed by physical holdings lodged with a custodian, there are many other charges, too, such as custodian fees and vault rental charges. I am not paying these, no thank you!

Discount to physical prices: Most ETF investors overlook the reason why these instruments often trade at slight discount to physical gold. Every ETF or mutual fund is allowed to hold some portion of its investment in cash so it can grab opportunities if prices fall, or to use derivatives as a hedge. Are we sure all such hedges will be profitable? When I buy life insurance, I am hedging against death. But that hedge comes at a price – the insurance premium. Sure, I sleep better at night but my take-home profit falls by the premium amount. Do you want to hold your ETF at a discount, however slight? It’s a call you have to take. The custodial and AMC charges are already eating into my profits slowly, so why add a discount to my burden?

In God and gold we trust

Buying physical gold doesn’t require blind trust. If you take the following steps, you can reduce the chance of being cheated on purity and/or weight to zero. Follow this step-by-step plan and your purchase price will be at least 5-7% lower than what institutional sellers offer.

Hallmarking: Whatever form you buy gold in (even hand- or machine-crafted jewellery) insist on hallmarking for the gold itself and a hallmark certificate. Negotiate a commitment from the seller to buy back the gold at a predetermined spread even if you don’t intend to sell.

Invoice: In the event of suspected or actual fraud, the law provides no protection if you paid in cash (off the books) and don’t have an invoice. I have not come across any wholesaler who has extra charges for credit cards, UPI, RTGS, NEFT or other digital payment methods.

DTA: This is my personal rule. It stands for: don’t trust anybody. I prefer to warn the wholesaler that I will be having the gold tested by anunrelated third party. I prefer to use electronic testing services rather than the traditional “rub test", which involves rubbing gold on a black stone and checking. This worked well until crooks got smart. What if the outer surface is pure gold but the core is a roadside pebble?

Electronic testing involves testing the piece of gold right to its core. The tester gives me a certificate and invoice, which validates what the seller gave me. If you go to the zaveri bazaar in any metropolitan city you may be charged between ₹ 50-75 per piece of gold, irrespective of the size.

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For the cost of a sandwich at a roadside eatery I get absolute peace of mind that I have not been cheated. Speaking of sandwiches, there is always a “khau galli" (literally, ‘food lane’) near zaveri bazaars in north and west India, so I will forever associate the aromas of traditional Indian spices with gold and jewellery.

So take a stroll down your local zaveri bazaar. You will return with either a shrewd investment or a sated appetite.

Vijay L Bhambwani the author of the first official commodities trading guide in India. He designs statistical and behavioural trading models for his family owned prop trading outfit. He lives in south Mumbai and has been in the markets since 1986. He post at @vijaybhambwani on X, and has a video blog atwww.youtube.com/vijaybhambwani