SEPTEMBER 13, 2010, 1:30 A.M. ET
By SHEFALI ANAND
Gold prices are at a record high but when has that ever stopped we Indians from buying more of it?
Market experts say that gold buying has continued even at the price of 18,864 rupees per 10 grams, and will go up as we get closer to the festival season starting next month.
In recent years, individuals have been increasingly buying gold "both for investment as well as for gifting," says Puneet Kapoor, executive vice president, Kotak Mahindra Bank Ltd.
It's hard to make a case for gold as an investment right now, given that it has gained more than 25% over the last one year. "We are, if not at the peak, very close to the peak," says Naveen Fernandes, head of institutional broking at Mumbai firm K. R. Choskey Shares & Securities Pvt. Ltd.
Still, if you want to invest in gold, the most convenient way to do so is to buy gold exchange-traded funds, which hold gold for you electronically just like shares. However, many people prefer to own physical gold.
If you are among them, consider buying coins and bars instead of jewelry. The latter can be expensive to buy and sell because jewelers typically deduct 5% to 10% of gold's market price as "making charges."
Over the last few years, a number of banks, jewelers and some private companies have been selling gold coins and bars to individuals through their branches and stores. Even the Indian postal service now sells these through more than 100 post offices throughout India.
Each of these channels has its advantages and disadvantages, so weigh them carefully before making your purchase.
Banks and the Post Office
All major public and private banks, such as State Bank of India, Punjab National Bank, HDFC Bank and ICICI Bank, have over the last few years started selling gold coins and bars. Here's a quick guide on what the banks offer:
1. Banks sell coins of as little as 2.5 grams and bars of up to around 100 grams in tamper-proof packaging.
2. The coins and bars are made of 24 karat gold which is 99.9% pure. Often, gold coins sold by your neighborhood jeweler are 99.5% pure.
3. You don't have to be a bank customer to buy gold from the bank. However, not all branches of a particular bank may sell gold and each branch may not have all quantities of coins and bars available at all times. So, call before you go.
4. You need to bring a card showing your Permanent Account Number (your tax identification) and, if you are buying gold worth more than 50,000 rupees ($1,075), you need to pay by check or your debit card. You can not pay by cash for large purchases.
5. Bank coins are almost always a little more expensive than the gold's market price that you might see in your newspaper or which your jeweler is quoting. The higher price reflects the higher purity of banks' gold. The price you see in the newspaper is usually for "standard gold," which is the 99.5% pure. In addition to the market price, there will be a 1% value added tax.
During festivals, several banks give discounts of 2% to 3% on the gold price, so that might be a better time to buy.
India's postal service also sells 24-karat, 99.9% pure gold coins, of denominations starting from 0.5g. Here's a list of post offices that sell these.
Caveat: The biggest drawback of buying gold from a bank or from the post office is that you can't sell it back to them in time of need. You will have to go to your local jeweler to sell it.
At that time, while theoretically the jeweler should give you a price for the 99.9% purity, there's no guarantee it will happen. "Each jeweler…will have a different value for the piece," says Sandeep Kulhalli, vice president of retail and marketing for Tanishq, a gold jewelry chain-store which is part of the Tata Group.
Some banks like Kotak Mahindra Bank have tied up with jewelers to help you sell in time of need, so you might want to ask your bank whether such an option is available.
Jewelers
Jewelers have sold coins and bars for decades but they've stepped up their efforts in recent years. The biggest challenge in buying from a jeweler is that you can't be sure of how pure the gold is and can end up paying a high price for poor-quality gold.
However, many large jewelers now provide a certificate of their gold's purity at the time of sale and an assurance that they will buy back these coins when needed. This assurance comes at a cost. Coins from Tanishq would be at least 5% more costly than coins from a small, neighborhood jeweler.
Even when buying from a jeweler you must ask the question: "What is the buying back rate?" says Mr. Kulhalli. In other words, how much money would the jeweler deduct if you sold the coin back to him?
Tanishq deducts nothing if you want to exchange Tanishq coins for jewelry but 5% if you want cash back. If you want to get cash back on non-Tanishq coins, you could lose as much as 10% of the market value of the coin. Some jewelers, like Tribhovandas Bhimji Zaveri of Mumbai, will not give you cash in return for coins from other jewelers. You can only get their gold coins or jewelry in exchange after certain charges.
If you can trust your jeweler to give you high-quality gold, to be around to buy it back from you years down the road, and to deduct minimal charges at the time of sale, that might be your best bet.
Write to Shefali Anand at shefali.anand@wsj.com
From The wall Street Journal published on SEPTEMBER 13, 2010, 1:30 A.M. ET
