Wednesday, December 23, 2009

All that glitters...

From time immemorial, gold was the centre of all materialistic desires. We all have read the famous story of king Midas who wanted only gold around him. Saint Kabir expressed his views as:
कनक-कनक ते सौ गुनी, मादकता अधिकाय |
एक खाय बौराय जग, एक पाय बौराय ||


The recent rise in gold prices has attracted investors a lot. We'll try to find out if investing in gold is actually profitable to the extent it is being described or not.


I, as an investor, buy gold ornaments weighing 100gms when gold prices were Rs. 10,000 each 10 gms. I paid a making charge of Rs. 250 each gram. Thus, I paid a total of Rs 1 lakh for gold and Rs. 25000 as making charges, making it 1.25 lakhs. On my bill, I paid a tax of say 10%, bringing the total to 1.375 lakhs.


Now the prices of gold are at 16000 per 10 gms and I decide to sell my gold ornaments. I go to the jeweler and he agrees to pay me in cash but after deducting 20% of weight (a standard practice). I agree and he gives me 80 X 1600 = 128000.


Five years back when gold was at 1000 Rs./gram, my ornaments cost me Rs.137500. After five years, I earn – 9500! OOPS! Did I make any mistake in calculation?


What if I get the price without any deduction? Lets find out. 100 X 1600 = 160000. My gain is 160000 – 137500 = 22500. That gives a 16.4 % gain in five years while the actual purchase price of gold went up by 60%!


That's not fair. I'll buy a gold bar from my bank which also gives me the purity certificate. Now I have a 100 gm bar I bought in Rs. 1 lakh. As the prices are now Rs 1600/gm, I approach my bank and the manager says that they are authorized for ONLY selling, not buy-back! No problem, I'll sell it to my jeweler (I'm smarter than this dumbo manager!). The jeweler straightway refuses my offer. My friend has bought a bar from the same jeweler. When he comes, the jeweler refuses to buy-back (you know that it is recession, people are not buying gold and I am short of operating capital).


With 100 gm of gold, I am holding a property that is worth Rs 160000. Do you agree to it?