The Hindu Business Line : Coins and futures, the new road to El Dorado

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Coins and futures, the new road to El Dorado

Sowmya Sundar

Investors prefer gold bars. — K. Mustafah

THE recent surge in gold prices to a 25-year high has done much to repair the metal's image as a good investment. Its value has doubled over the past couple of years. If you already own stocks, fixed deposits and property, you may be wondering if you should now invest in gold. Some of you may also like to buy gold for special occasions. If investing in gold is on your mind, here is how to go about it.

Jewellery: A poor investment

Gold coins or gold futures are superior choices to jewellery. The making charges and wastage incurred when you buy or sell jewellery can melt away a substantial portion of the initial investment. The wastage and making charges can be as high as 20 per cent of the value of the gold.

Superior choices

The choice between coins and futures will depend on whether you are a long- or short-term investor, and whether you can devote time to track gold prices. Your investment objective will also play a role. If you are the `buy it, shut it, forget it' kind of person or if you have a long-term investment objective, say, of saving up for your daughter's wedding, then buying gold coins or bars could suit your needs. You would need to worry about the price only when you sell it. Buying coins is also simple and easy.

If you are keen on making a killing on every blip in gold prices and have a relatively shorter investment time frame, then you should be looking at futures. But investing in futures is time consuming, as you will have to keep track of the demand-supply dynamics that drive gold prices in the international market and take a view on the likely price movements as well. Speculative trading could also be highly risky.

Coins: For the conservative

Most jewellery retailers sell gold in the form of coins or bars. A few banks too have introduced 24-carat gold coins or Swiss bars in various denominations to cater to the investment demand. Jewellers mostly retail 22-carat gold and price it based on the daily Mumbai price. Some do sell 24-carat gold. Banks, on the other hand, sell 24-carat certified pure imported gold. Jewellers tend to price coins and bars differently from banks.

Pricing

Jewellery retailers price their coins based on the Mumbai gold price, whereas banks directly import gold and hence their pricing is based on the international price. Jewellers charge a mark-up on the price, of 3-4 per cent of the price of gold, towards die and moulding charges.

This, according to them, covers the costs involved in converting the bullion into coin form.

Then, there is the sales tax component, which some jewellers may waive depending on whether the payment is made through cash or credit card. Paying through credit card will mean paying sales tax. Most jewellers waive sales tax if you pay cash. Some jewellers also charge an additional sum for credit card payments.

When you buy from banks, you have to pay sales tax. The price of the coin sold by different branches of the same bank might differ on account of VAT structure for various States.

Banks fix the prices daily based on the landed cost of gold, which includes taxes such as Customs duty and Octroi and adjusted for the rupee-dollar exchange rate. The base price is the international price as quoted in the London Metal Exchange. In addition, they have to pay a premium to the supplier, of 3-4 per cent. Over this price, the banks have a mark-up, also 3-4 per cent, according to a senior bank official.

The pricing of coins by banks may be slightly higher but the quality is guaranteed. When you buy from a retailer you have to check if it is hallmarked and also bargain for the best price.

On why one should buy coins from banks rather than a jeweller, Mr N. Suresh Pai, Executive Vice-President of IndusInd Bank, said that banks assured quality. "Our coins are imported and have an assay certificate and offer 24-carat pure gold." Mr Sunil Cherian of Kerala Fashion Jewellery, a Chennai-based jewellery retailer, has a different view: "The coins sold by banks are comparatively more expensive. Their pricing is at least Rs 50-60 higher per gram. We sell hallmarked gold coins that assures you purity."He admitted, however, that not all jewellers sold hallmarked coins and that the buyer should check and insist on hallmarked gold.

Pricing on resale

Banks do not buy back gold. You will have to sell in the open market. You'll have to bear a discount on sale.

The discount, however, is much lower compared to that on jewellery. If you were to exchange coins for jewellery, most retailers take the coin at its face value. This could be because the trader makes his margin on the jewellery. But if you were to trade the coin for cash, then you have to do so at a discount to the current market price. The discount could be in the range of 3-5 per cent.

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