INVESTMENT IN ORNAMENTAL GOLD: IS IT WISE OR FOOLISH?

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:

S.no	Evaluating parameters	Factors determining worthiness		Appreciation/Erosion in asset value
1	Quality	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	Capital protection guarantee	Life time investment	Since, the investments are for longer term, the nett. Capital alone is protected.	0%
3	Acquisition costs	High making charges	High, especially by high end stores.	-5% to -20% (Unrecoverable)
		Wastage charges	Very high, especially for exotic designs.	-5% to -30% (Unrecoverable)
		Losses in Weighing & Embedded Stone charges	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.	-0% to -20% (Unrecoverable)
4	Maintenance costs	Constraints in physical storage	Needs to rent a bank locker to store our valuables.	-1% to -2%
5	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%
6	Usefulness	Used occasionally	Most of the ornamental jewellery is used by women rarely during major family celebrations.	+2%
7	Ease of liquidity	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.	-5% to -10% (say)
Inflation adjusted Nett. Asset value (Pre-tax):				60% of the original investment amount will remain with the investors.

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.

SUGGESTED READING: Blog readers with a penchant for investments in GOLD SAVINGS SCHEME can gain more insights by clicking the following hyperlink.

http://articles.economictimes.indiatimes.com/2012-10-22/news/34653646_1_jewellers-offer-paper-gold-savings-scheme