"India Bullion"
World's Best Performing Asset for 5,000 years

India- Gupta Dynasty, Kumara Gupta-I gold dinar (415 AD)	Gold coin (India-1611 AD) struck by Shah Jahangir with his likeness	Roman gold coin	Roman Judaic shekel gold coin (10 BC)

Gold and silver that we buy

In India bullion consisting of gold and silver coins and bars has been traditionally accumulated and viewed as a measure of true wealth. This is in addition to basic gold and silver jewelry in the form of bangles, bracelets, anklets that are either of a high purity, or the premiums over the spot metal prices are low. So, it is not surprising that today India is the largest consumer of gold in the world. at an annual import of gold being around 750 to 800 tonnes.

How we treat gold and silver

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.

Gold and silver jewelry is not an 'investment'

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. The lazy argument is--"oh, the jeweler is going to give me less than 22 carat purity anyway, so I might as well not pay the making charges." This way you are participating in this fiction and encouraging the dealer to make this a necessary practice even if he does not want to do this--it does not benefit anyone ultimately.

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.

If you get silver or gold jewelry with enamel work ('meenakari') then you are paying a whole lot of money for glass at gold prices. The same is true of filigree-work gold which can contain 30% or more by weight of silver and baser metals like copper and brass. Of course, you pay for all this at gold prices.

India Bullion Masters of the Minimal
I have great admiration for the South Indian bullion goldsmiths who are masters of the minimal. For example, in addition to bullion coins and medallions they craft the famous Coorgi bangle which is a work of art that can be made of light, hollow gold that somehow looks very solid. But these lightweight bangles can get dented fairly easily if one is not careful. For daily use more solid stuff is needed!

Another specialty of the Southern jewelers is lacquer filled hollow jewelery pieces, especially lac-filled gold beads, pendants and amulets that look like the real deal. These are filled with light-weight lacquer raisin, and the thickness of the gold is micro-millimeter thin and can peel off easily. The gold recovery value in such items is very little compared to your purchase price.

The bottom line why jewelry is not an investment

• 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. Indian 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, what is a good investment value in gold and silver and why?

• 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 has increased in value over 160% in the past ten years, giving a return or appreciation of 16% per year. Over the past thirty four years, from 1974 to 2008, the gain has been from $180 per ounce to $980 a troy ounce (approximately 31.1 grams). This is a 444% increment on average, in the past thirty four years--or a 13% increase in value per year.

• However, if you consider the factor of foreign exchange rates and rupee-dollar value, and today's Indian bullion gold prices you 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.

  If we consider that India bullion gold was available at about a 40% premium to the international price 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 2008, if we take the gold price of around $980 an ounce, the rupee is Rs. 40.50+2% tax on gold purchase, or Rs.41.30 to a dollar.

  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.

  So, to see how India bullion gold performed in comparison to the dollar and rupee currencies we can compare one ounce of 1974 gold ($180) in 1974 rupees to one ounce of gold in 2008 ($980) in 2004 rupees, we get:

  • In 1974 one ounce of $180 gold (@ Rs.13.30/$) was worth, say: Rs. 2,400/-. In March 2008, one ounce of $980 gold (@Rs.41.30/$) is worth, say: Rs.40,474/-.

    The appreciation of India bullion gold in these thirty four years is: 444% or about 13% per year.

  • At the same time, in 2008, it takes about 40.50 rupees to buy a dollar as compared to 9.50 thirty four years ago, which is a 326% depreciation against the dollar, or 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, then it takes $980 to buy an ounce of gold in March 2008 that was $180 in 1974-- an appreciation of 444% or an average annual appreciation of 13%. The same calculation for a rupee against gold (Rs. 13.31 versus Rs. 41.30) gives us a gold appreciation of only 210%, or 6% per year, compared to 13% appreciation against the dollar over the past thirty four years.

    Or in other words, India bullion gold has been relatively cheaper to buy using gold-rupees as a benchmark during this period.

    This 7% difference in favor of gold is an automatic additional inflation fighting wealth builder. More reason in favor of building wealth using gold bullion.

  • If we assume that as an investor one will average out the costs of purchasing over the years, it is pretty safe to estimate that in real purchasing power terms gold investment would grow between 12% to 20% annually.

    In the last 10 years, India bullion gold and silver have appreciated at over 20% per year, and is currently expected to go much higher as further articles in this series will show. This would be well ahead of the 2007-2008 5% to 10% inflation, which inflation figure I expect will go up further considering the national and global economic scenario. As this happens, the price of gold will also go up.

    If there is deflation, gold will still retain its value compared to paper money.

  
  

• No other investment can give this kind of return, security and convenience of liquidity. Gold (and especially silver) have had their volatile ups and downs, but long term gold and silver bullion investors have had steady gains in their holdings if they accumulated the precious metal periodically.
• For what is a practical, solid India bullion investment in gold and silver--read on.

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