Financial Planning

Buying Gold from your bank? Beware!

This article was first carried on Personalfn.com on November 10, 2006. The article deals with how buying gold from banks can prove to be an unenviable proposition for investors. We have reproduced the original article in its entirety; albeit the numerical data (price of gold) may be dated, the core theme of the article i.e. mis-selling remains as relevant now, as it was then. We have chosen to reproduce this article in view of the forthcoming festive season, for which banks have gone in an overdrive for promoting their gold retailing activities.

Banks have hit upon a new idea to get a larger share of your wallet – retailing gold. While the banks claim that buying gold from them is a wise decision, we beg to differ. In fact we would go so far as to say that if you want to buy gold, don’t go to your bank!

Why Gold?
There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio. You can read our detailed note on the reasons for and against investing in gold. Suffice it is to say over here that you must have about 5% of your wealth in gold.

Form of Gold
The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130. So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality.

The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say “biscuits”!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries. There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.

Where to buy Gold?
In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a “neat buck” off you. We will let the numbers speak for themselves.

On the 8th of November, 2006 we called one private sector bank and one jeweller making an enquiry to purchase gold. This is what we got as a response –