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Buying gold from a bank?

gold_pamp_1_oz_bar_pkgRecently there is an increased aggressiveness from banks to sell gold. Almost every single bank out there is selling gold in fancy sealed packs with certificates attached to it. Banks hold gold reserves which are proportional to their financial holdings. Earlier banks were not allowed to sell gold directly to the customer. They had to liquidate gold to release the cash, when required. But now with the amended rules from the Reserve Bank of India, every other bank has opted to sell the gold directly to the customers out there. This is a quick and easy way liquidate their gold reserves. But as customers, do we benefit from it?

With the stock markets tumbling like a stack a cards, the next best investment is Gold. Customers, mostly working class would love to jump the Que and get things done faster. So these people want to buy gold, but they are not willing to spend their time waiting in Que or juggling crowd in a jewellery store. Also they don’t trust the Jeweller’s integrity. So they end up buying gold in banks. Some banks also offer door delivery. This results in happy customers and more business for the banks. But as an investment, does it do any good to your pockets?

The answer is “No” and why?

  1. Yes, banks are trustworthy when it comes to purity, but the certificate they give is worthless. A purity meter in any trusted jewellery showroom would suffice for a quality check.
  2. Banks sell gold at premium rates. They sell it for at-least Rs 200 more, per gram.
  3. They don’t buy back the gold.
  4. When you try to sell the gold to a jeweller, you obviously loose the overhead paid in the name of premium price.

Just a simple equation. Assume you have paid Rs 120 for gold, whose market price is 100 today. Tomorrow, you go to sell the gold assuming there is a Rs 10 increase in gold price. The price rise is on the market price of gold and not on bank price of gold. So you get Rs 110 and you have lost Rs 10.

I have seen a lot of customers who have lost quite a hefty sum when they want to liquidate the gold they purchased from bank. They are clueless as to what happened and why they are loosing money at a point where they must have actually gained money in the current gold price scenario.  But when the equation is explained to them, they realize that they have been taken for a ride.  Surprisingly they victims are usually educated mass. What amuses me is that these people generally bargain for 1 rupee or 2 rupees with vegetable vendors or street shops, but ultimately loose out their money to the corporate bigwigs.

General advice is to buy gold from reputed showrooms. Make use of the carat meters that are available with many jewellers nowadays. For investment purpose, gold coins and gold bars are suggested rather than jewellery. Pretty packaging, Brand names and certificates are not worth the premium price you pay. And finally, spread the awareness.

7 responses

  1. Me a passive victim of this phonmenon sir….

    April 29, 2009 at 7:22 AM

  2. Landed to ur blog following from ur twitter a/c. Great article.

    I was working for a Jewellery company in 2007 and being the BD was tryin to find the ans to why not banks but showrooms. while searching on Google I landed to this article which gives similar reasons as you jotted down.

    April 29, 2009 at 1:00 PM

  3. Giridhar

    very useful link. thanks for sharing it. :-) I need to look into this ETF as well now.

    April 29, 2009 at 1:35 PM

  4. nice post da!… will spread the word around!

    April 29, 2009 at 5:48 PM

  5. nice one giri.

    May 20, 2009 at 11:50 PM

  6. TVK

    Inimelu unga kadailiye vaangiren……

    ULIP is one such “investment” that the educated mass fall prey too.

    June 12, 2009 at 11:57 AM

  7. goldcoin

    Thanks for the great reading,we buy Gold Bullion I will pass this on to our Ira clients to read.

    November 4, 2009 at 8:43 AM

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