• Just to be clear--'Investment' is that application of one's earnings/assets that give a financial return as income, or as appreciation, while keeping the capital invested protected from erosion or loss. Of course, depending upon the type of investments, there are low to high 'risks' to the capital. 'Savings' on the other hand is capital that is meant to be handily available for emergency or sudden needs, or savings for future needs including investment.
• Savings may not be as protected from erosion of value as investments because the trade-off is liquidity of the savings capital and protection of the capital rather than appreciation of the capital, such as money in a locker or safe, or a certificate of deposit with a bank.

  For example, money kept as a fixed deposit (CD) in a bank usually earns a rate of interest that is lower than the economic inflation number. Add to that the income tax on interest income, and you would find that there is actually a real loss of purchasing power by keeping the money in a fixed deposit at the bank.

  In a bank savings instrument, there is is relative ease of access and availability of the asset and less of a loss than just keeping the money in the cupboard or bank locker. The value erosion is the 'holding cost' of such liquid assets, and this is fine as long as one is clear about the purposes of each type of holding--investment or saving.

• However, as we will see, gold and silver are unique in that they combine the advantages of investments and liquid savings--provided they are regularly accumulated over a long period of time.

In India private holding of bullion has traditionally consisted of gold and silver jewelry of high purity in the form of bangles, bracelets, anklets that may be worn and are conveniently portable.

In addition, gold and silver coins and bars are also accumulated, and whether as jewelry or as bullion coins and bars, these two metals are viewed as a measure of true wealth.

• So it is not surprising that today India is the largest consumer of gold in the world, perhaps now only second to China. India annually imports gold at around 1000 tonnes (2011), up 25% over the past couple of years.
• Gold and silver bullion (excluding made-up jewelry) can in the long term combine the purposes of savings as well as investment.

India bullion in towns and cities is slightly different. The urban dweller also looks at gold and silver as an investment, but somewhat differently. Traditionally 22 carat (91.667% pure) gold bangles, or sterling silver (92.5% pure) jewelry, tableware have been a form of everyday use investment.

Today, the younger professionals and the older wealthy spenders prefer designer jewelry which carries high premiums. The gold or silver value in such jewelry can be astonishingly low.

At the time of buying the jewelry or processed India bullion coins or bangles there would have been a 'making charge' also, anywhere from 3%-10%, depending on what you buy. This means that the moment you buy such jewelry, it's value would have been reduced by 2% to 20%--or 30% less in case you received a lesser purity of gold. In the case of genuine 22 carat gold bangles the premium may be around 2%-4%, which is actually quite good.

If you thought you were a great negotiator because you bought, say, 22 carat gold jewelry at very near the carat rate and did not pay the making charges, the chances are that you were not and you did not. The seller has been in business longer than you have been buying, so there is no way you would get the better of him in prices or quality.

In this case you may have bought jewelry that was not of the purity you thought you paid for. If you paid at near the 22 carat rate but got 19 or 20 carats' worth --you have lost about 10%+. By the way, this is not as uncommon as you may think.

• Always know your jeweler or dealer and the quality of his products.

So--know your dealer and the quality of his products--test them both once in a while. You have the absolute right to ensure the quality of what you are purchasing. Many jewelers who deal in gold bullion and jewelry now have very sophisticated, expensive spectrum analyzer machines that test the purity of the metal without destroying or melting it. If you cannot find one such, get the metal tested by an independent laboratory.

In New Delhi there are a number of them in the Lajpat Nagar and Chandni Chowk areas.

Silver - Sterling or otherwise
For silverware you may end up paying 20% or more as making charges for even such standard items like the 'lemon set'-- consisting of a silver jug and six silver tumblers, or silver serving bowls ('doongas'). For a sterling silver (92.5%) tea service you could pay more, even upto 30%.

In practice, the quality of silver varies from shop to shop regardless of the claims to purity. You would need to apply the same standards of prudent buying as for gold--know your dealer and his product, and test them from time to time.

• As we have seen, this type of jewelry loses up to 30% or more of it's purchase price the instant you buy it as compared to Indian bullion. That puts it in a category of something like a consumer item: a new car or TV, for instance, loses 20% to 40% of its value the moment you buy it.
• One may argue that over the years the value of the jewelry will appreciate. Yes, it would, but it would not overcome the high premiums already paid and the high making and wastage charge deductions at the time of sale.

  This 'loss' is built into the jewelry and will carry forward in time at the same rate as by which the jewelry might have appreciated. This 'appreciation' is, of course, the inflation cost (the same thing is more expensive next year), and similarly the original built-in 'loss' will also inflate in relative proportion. India bullion of near pure metal with a minimal premium does not suffer this kind of loss.

• Fortunately, even if we do not recognize this, the tax authorities do. When you have jewelry evaluated for wealth tax purposes, as the price of gold increases over time, the tax-man accepts valuations based on actual gold content alone.

So, given this situation, is India bullion a good investment value?

• The short answer is--when things become more expensive in time due to inflation, gold outstrips inflation very significantly in value appreciation over a long period of time.
• Gold and silver serve the purpose of 'savings' and also 'investment'. Savings are emergency or future need funds, while investments are looked at from a financial return point of view. In the short term, silver especially is very volatile in price, and may not be an investment from the viewpoint of maintaining steady value or trading; but gold and silver actually fulfill the purpose of savings as well as investment over longer periods of time.
• Gold has increased in US $ value of over 450% in the past ten years, giving a return or appreciation of 45% per year. Over 37 years, from 1974 to 2011, the gain has been from $180 per ounce to $1600 a troy ounce. This is a 790% increment--or a 21%+ increase in value per year.
• However, if we consider the factor of foreign exchange rates and rupee-dollar value, and today's Indian bullion gold prices we will find something even more interesting. In 1974, gold was at $ 180 per ounce. The effective rupee-dollar rate was Rs. 9.50 to a dollar.

  India bullion gold was available at about a 40% premium to the international price in 1974 because of tight governmental control (hence the huge smuggling trade in gold back then), we get a gold purchase rupee price of Rs. 13.30 per dollar. In 2011, if we take the gold price of around $1600 an ounce, the rupee is Rs. 49.00 + 2% tax on gold purchase, or Rs.49.98 to a dollar--or say Rs. 50.00. (In 2008 the Rupee-dollar value was 40.50, gold was at $980 per ounce.)

  This is essentially the inflation cost of goods and services reflected in a devaluation or decreased purchasing power of the currency--or, stated another way, the appreciation of gold over the years.

• In 1974 one ounce of $180 gold (@ Rs.13.30/$) was worth, say: Rs. 2,400/-. In September 2011, one ounce of $1600 gold (@Rs.50.00/$) was worth, say: Rs.80,000/-. (The same gold in 2008 was worth Rs. 40,474/- where the rupee was at 40.50 to the dollar, + 2% tax on gold= Rs.41.30.)

  The appreciation of India bullion gold from 1974 to 2008 is 1586% or at about a simple rate of 47% per year. If we calculate the rise for gold for 2011 from 1974, we get a whopping appreciation of 3,233%! That is an appreciation of gold at a simple annual rate of 87% per year. Of course as you can see, the price of gold did not rise steadily, but in rather volatile spurts over the 3 years since 2008.

• We can also compare the relative value of gold bullion versus the dollar and rupee:

  In 2011, for purposes of purchasing gold, it takes about 50 rupees to buy a dollar as compared to 13.50 in 1974 (adjusted from Rs. 9.50 for gold price equivalency). This is a 270% depreciation against the dollar, or about 14% per year. (Until 2008, the depreciation was 326% or about 10% per year.) It takes that many more rupees to buy a dollar--or anything else, for that matter!

• If we take gold as a benchmark, and it takes $1600 to buy an ounce of gold in 2011 that was $180 in 1974--then, on a dollar to dollar on gold value basis the dollar has depreciated by 88.75% in purchasing power for gold.

  The same calculation for a rupee is Rs. 2,400 per ounce in 1974 versus Rs. 80,000 in 2011, which gives us a rupee depreciation against gold as: 97%!