Wanna buy gold? Just go demat

MUMBAI: “You should have called me earlier. It will cost Rs 1 lakh and you’ll have to get him admitted in two days or things may go out of our hands,” the doctor said, noting down the mercury level. The feeble movement of ribcage was the only sign of life in the boy.

The amount, Rs 1 lakh, in two days was a big task for him, but then, he had to save his dying son. As his thoughts scanned one by one, suddenly it came to his mind that there was 100 gm of gold jewellery lying in the locker, which his wife had insisted on buying sometime last year. He went to the jeweller from whom he had bought the gold. It took a little while for his eyes to cope with the dim light in the jewellery shop and realise the jeweller’s smile was not one of acquaintance, but a foxy one.

The jeweller, closely examined the pendant, rubbed it on the slate, weighed it, scratched his head for a while, and said, “This is impure gold. If you want to make a deal, take Rs 81,900 and leave.” According to the jeweller, only 91 gm of the total 100 gm was pure gold, and he would pay only for that. Time was running out and he could not afford to argue with the jeweller on whether the gold was impure or not. Talking money when someone’s life is at stake is the worst thing to do, but planning ahead, so as to avoid a similar situation, is the best thing to do. Gold was quoting at Rs 9,000 per 10 gm (i.e., Rs 900 per gm), hence he decided to take the Rs 81,900 (91 x Rs 900) and leave.

His wife had bought the jewellery for Rs 73,500, when gold was trading at Rs 7,000 per 10 gm. The gold had cost him Rs 70,000 (Rs 7,000 x 10) and the jeweller had added an extra 5% of the cost of gold, towards making charges. Hence, the making charges had amounted to Rs 3,500 (5% of Rs 70,000).

Having sold the gold for Rs 81,900, he made a return on investment (RoI) of 11.4%, on his total investment of Rs 73,500.

Instead of buying jewellery, had he bought the same quantity of gold through an exchange, it would have cost him Rs 70,175 (Rs 70,000 as the cost of gold plus 0.25% of Rs 70,000 as brokerage charge). He could have easily stored gold in the demat form for a year.

This would have cost him approximately Rs 720 for one year. In this time of need, he could have sold the gold at its actual price of Rs 9,000 per 10 gm less the brokerage of 0.25%. This would have given him Rs 89,775 (Rs 90,000 - .25% of Rs 90,000 as brokerage). The total gain would have been Rs 89,055 adjusting for the storage cost of Rs 720. On an initial investment of Rs 70,175, this meant a return of 26.9%. Other than this, he could sell the gold at any point of time, and also ensure safe keeping of the yellow metal in the demat account.

More than one factor contributed to this cheap sale. First of all, purity standards differ from jeweller to jeweller, and hence, the value of your trinket is entirely dependent on the jeweller’s discretion. Secondly, one cannot get back the making charges when selling jewellery. Then, it is widely believed that one would sell jewellery only on dire necessity. This gives the jeweller an upper hand to take the full benefit of it.

“Branded jewellery has common standards of purity, but even then, one stands to lose on selling it, because making charges cannot be recovered,” says Pankil Shah of Angel Broking. Branded jewellery, is costlier since it generally carries a higher making charge and a 2% excise duty. These charges are not recoverable on sale. Though exchanges do not mandate a demat account for trading in commodities, one has to have it for delivery purposes. A trading and demat account can be opened with any exchange-approved intermediary as in the case of stocks. Some of the major names in commodity broking include Sharekhan Broking, Geojit Financial Services and Kotak Securities.

Another benefit of opening a demat account is that one can pledge the physical gold stored in the warehouses and trade for a certain percentage of the value of the gold. This percentage is arrived at after a haircut (a certain percentage deducted from the value of gold as a safety measure against downside price risk) that exchanges deem is necessary to protect the downside risk arising out of the volatility in gold prices. This haircut may vary from exchange to exchange.

For example, say, a person wants to pledge gold worth Rs 10,000 at the start of the month and trade on it. He has to create a pledge (for which his broker would help him) and the exchange would, after a haircut of, say, 8%, which again is a function of volatility, transfer Rs 9,200 from his demat account into his trading account.

He can use this Rs 9,200 for trading. If, in case, spot gold prices start showing increased volatility and fall, the exchanges may call for additional margins. If the individual fails to pay the additional margins, the physical gold on pledge will be liquidated by the exchange.

The example is hypothetical