The Global recession of 2008 and European
debt crisis has accelerated the investments in to gold as investors and
speculators, having lost appetite for highly volatile and risky paper assets (major
currencies and government backed securities) and switched over to relatively
safe Gold investments.
Moreover, investments in to Gold in India is further accentuated by the conjecture that the yellow metal is a natural hedge against the high inflation and supposition that Value to Price ratio is nearly one or even higher.
The above conjecture in theory looks convincing and smart at the outset, if the Value to Price ratio is nearly one or even higher. There are various avenues for investing in Gold viz., Gold ETF’s, Mutual funds, Physical Gold bars, and Ornamental gold. However, Indian middle class people, who are highly susceptible to impacts by government price and policy actions, tax structure changes, upheavals in banking & financial sectors and consumer inflationary pressures, are lured in to investing in Ornamental Gold negating the additional costs involved in this asset class.
All investments in any asset class have its own positives and negatives and investment worthiness needs to be evaluated from time to time. The worthiness of an investment is determined by evaluating the asset quality, capital protection guarantee of the asset during adverse economic conditions, low acquisition and maintenance costs of an asset, Nett. Rate of Returns it generates during its life time, usefulness, and ease of liquidity of the asset. Let’s evaluate the worthiness of investing in ornamental gold duly considering the investment parameters:
Moreover, investments in to Gold in India is further accentuated by the conjecture that the yellow metal is a natural hedge against the high inflation and supposition that Value to Price ratio is nearly one or even higher.
The above conjecture in theory looks convincing and smart at the outset, if the Value to Price ratio is nearly one or even higher. There are various avenues for investing in Gold viz., Gold ETF’s, Mutual funds, Physical Gold bars, and Ornamental gold. However, Indian middle class people, who are highly susceptible to impacts by government price and policy actions, tax structure changes, upheavals in banking & financial sectors and consumer inflationary pressures, are lured in to investing in Ornamental Gold negating the additional costs involved in this asset class.
All investments in any asset class have its own positives and negatives and investment worthiness needs to be evaluated from time to time. The worthiness of an investment is determined by evaluating the asset quality, capital protection guarantee of the asset during adverse economic conditions, low acquisition and maintenance costs of an asset, Nett. Rate of Returns it generates during its life time, usefulness, and ease of liquidity of the asset. Let’s evaluate the worthiness of investing in ornamental gold duly considering the investment parameters:
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S.no
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Evaluating parameters
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Factors determining worthiness
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Appreciation/Erosion in asset value
|
|
|
1
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Quality
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Purity of gold and Hallmarking
|
Purity of gold may not be of the level that
is being claimed, since the hallmarking services test only a fraction of the
gold jewellery submitted for testing, thus raising concerns of hallmarked
jewellery as well.
|
-5% to -10% (say)
|
|
2
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Capital protection guarantee
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Life time investment
|
Since, the investments are for longer term,
the nett. Capital alone is protected.
|
0%
|
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3
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Acquisition costs
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High making charges
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High, especially by high end stores.
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-5% to -20% (Unrecoverable)
|
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Wastage charges
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Very high, especially for exotic designs.
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-5% to -30% (Unrecoverable)
|
||
|
Losses in Weighing & Embedded Stone
charges
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Trust in Gold jewellery business is evaluated
to be the minimum. Many major jewelers are found to be compromising on the
weight and quality parameters by including the precious stone weight as that
of gold.
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-0% to -20% (Unrecoverable)
|
||
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4
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Maintenance costs
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Constraints in physical storage
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Needs to rent a bank locker to store our
valuables.
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-1% to -2%
|
|
5
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Perennial Returns
|
Nil
|
Considering an average appreciation of 8%
and 8% of inflation over a period of 25 years, the nett. Rate of returns
(NRR) is nil.
|
0%
|
 |
||||
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6
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Usefulness
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Used occasionally
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Most of the ornamental jewellery is used by
women rarely during major family celebrations.
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+2%
|
|
7
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Ease of liquidity
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High but depreciated returns if hard cash
is required.
|
Major jewellery houses are ready to
exchange the gold sold by them at market rate and very few are willing to pay
in cash subject to a deduction of 5-10% of the value. Gold may not be
evaluated fairly both qualitatively and quantitatively, if gold ornament on
sale is bought from a different jeweller.
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-5% to -10% (say)
|
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Inflation adjusted Nett. Asset value (Pre-tax):
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60% of the original investment amount will remain with the investors.
|
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Also, it may be noted that the cost of Gold
in India is higher due to depreciation of Indian currency vis-à-vis green back,
import duties and government taxes, the latter two costs being irrecoverable
when an investor sells the gold in open market. Hence, it is unmistakably evident
from the above table that the investment in gold in an ornament form will lose 40%
of the front end value for the metal. It
is suggested the gold ornaments may be purchased, if inevitable, more as a
consumer durable rather than as a long term investment. It is prudent and wise
to delink personal/ family investments and ornamental gold and instead invest
in other asset classes for better returns and capital appreciation.
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