How to buy gold and silver
When you buy a car, there could be a justification for paying more for a Swift over an Alto; you could consider paying more for a Louis Philippe Shirt over a shirt from a lesser brand; you might willingly pay twice that amount for a designer shirt that is exclusive. In some cases additional features justify the higher price, and in some cases it is justified by the brand value. How much premium should be paid for "brand" value is debatable, but there is some justification for it once you have taken care of your basic necessities, and want to show that you are progressing in life.
That is as far as consumption expenditure goes. When it comes to investments, would you pay more for one share of Reliance just because you bought it from a big reputed broker? Perhaps you may pay commission at a few basis points higher for the convenience of dealing with your regular banker or broker, but I am sure you would not want to pay too much of a differential. When it comes to commodities like oil, iron, or copper, would people pay more just because they are buying from a different source? The international price of all commodities at the wholesale level is the same.
Gold and Silver are investments, and they are also commodities. Ignoring ornaments for now, would you pay more for a ten-gram gold biscuit (whatever the grammage, we shall refer to it as biscuits in case of gold, and bars in case of silver) just because you are buying it from a particular source? Let's assume you are willing to pay more because you are buying it from your bank, but how much more will you be willing to pay? 1%? 2%? What if I tell you that your bank charges you at least 15% more than what you would pay if you knew where to shop? Would you still buy gold from your bank? They won't even buy it back from you – just check the purchase price from your banker today, and ask your jeweler how much he would be willing to buy it at. The difference is the buy-sell margin you pay. If it is anything less than 15%, let me know.
Gold ornaments have been considered a good investment since time immemorial. Ornaments are no doubt good as investment, since the value of gold tends to go up over time; however, buying gold in ornament form has its drawbacks. The "making charges" are anywhere between 7 to 15 percent depending on the intricacy of the design. When you return it there may be certain deductions like "melting charges". If you return it to a different jeweler than the one you bought it from, it is certain that he will cast aspersions on its purity, and tell you that what you thought was 22 carat is only 20 carat gold. There goes another 10 percent! You could ask for BIS certified gold or buy from a reputed brand like Tanishq – this ensures that the "melting" purity is what has been guaranteed – but in that case the making charges are likely to be at the higher end of the band. The good brands may not even quote you a rate per gram, they will talk only of a "piece rate".
There is no harm in buying gold ornaments; in fact, for those men who are married or have girlfriends, it is highly recommended. Just don't think of it as an investment, at least not as an investment in gold! Once you think of it as a consumption item, you will not mind paying the making charges; in fact, you will splurge on the most intricate pieces, as you should.
When you invest in gold, you should buy only 24-carat gold biscuits. Depending on where you buy it from, the person selling it to you will try to justify higher prices based on "quality" – once you are assured that you are buying from a genuine source, any talk of quality to justify a premium is bullshit. Have you ever taken your old gold jewelry to the shop wanting to sell it? My wife and I have, and we have had the experience of the jeweler putting the ornaments in a pan and applying a blowtorch to them, converting the whole thing to a lump of gold, the purity of which he later checked. It does not matter if it is specially imported from Switzerland, it does not matter if the packet looks pretty or if the gold itself has some fine sayings embossed on it, it does not matter if the relationship manager offers to deliver it home – the value of gold lies in the intrinsic worth of the metal and nothing else. Once you cease to look at gold as an ornament, there is a definite reduction in the mystique!
Since it is a commodity after all, the trick in buying is to buy at the lowest price. Most jewelers you ask will refuse to sell you gold biscuits; since there is not much margin in it, they don't stock it. Some will tell you they have only their own store-branded 22-carat biscuits. This is preferably avoidable. Finally, you will find some jewelers who will be willing to sell you biscuits. They will charge you one percent sales tax on that day's price while selling it to you, and buy back the biscuits bought from their own store at about 3 to 5 percent less than that day's price. A large jeweler like Tanishq offers to buy it back at 5 percent less than that day's price, and the quality is assured. Shubh Jewellers which has several outlets in Bangalore buys it back at Rs.51 less which works out to 2.5% less. That is when they buy back biscuits you bought from them in the first place; what we need to see is what we get when we sell it to any other jeweler in the market.
The best way to go about it is to of course compare the price that you are getting with the benchmark rate for the day, i.e., the 24 carat gold rate that is published in the newspapers. Among the retailers, Shubh jewelers is the lowest with a 2.5% premium over the day's rate. Any jeweler should be willing to buy biscuits from you at a couple of percent lower than the day's benchmark rate; adding the one percent sales tax that you pay on purchase, gives us a buy/sell spread of about 5 percent at the cheapest retail sources. The buy/sell spread when you buy in retail would generally be between 5 and 8 percent, taking all these factors into account.
When you buy from a bank, you can only sell it back to a jeweler since banks don't buy back what they sell to you; they charge you 15 to 18 percent more than the day's benchmark rate, and the jeweler when you sell it back will take off another couple of percent. The bank might give you a 2 or 3 percent discount to keep you happy. Your net spread works out to anywhere between 15 and 20 percent.
When it comes to silver, you buy it not in grams, but in kilograms. You are unlikely to get nicely minted bars like in the case of gold; the market believes in bars of silver poured into "kutcha" moulds, which are never exactly equal to half kg or one kg or whatever – but you don't have to worry, since you pay for the exact weight. You should buy silver bars (99.9 percent purity) from a jeweler who is willing to sell it you – very few are – after checking on the buy/sell margin. I find Sri Krishna Diamonds and Jewelry (No. 1, Commercial Street) to be a good source; the buy/sell margin works out to 6 percent – 1% sales tax when you buy, and a deduction of 5% when you sell it back.
An even better way to cut the spread in case you are someone who buys in reasonably large quantities (say at least 100 grams in case of gold and 5 kg in case of silver) is to buy from the wholesale market. That is of course Zaveri Bazar when it comes to Mumbai and the area around Avenue Road when it comes to Bangalore.
At about Rs.45,000 per kg of silver vs. about Rs.20,000 per ten grams of gold, silver is more voluminous to handle and store. Holding gold and silver in physical form also exposes you to the risk of theft. If that bothers you, it is possible to buy gold and silver in demat form , either as ETF's, or as e-gold and e-silver. We shall examine that in Part 4 of this series.
(A lot of the information given in this article is based on first-hand personal experience - it is possible that you know of other good sources that provide equally fine or better rates. Do add your comments or write in case you have any information to share.)