Gold is Illiquid
i am not sure whether this is a one off experience or true across many locations…
In chennai when a friend tried to sell gold worth Rs. 3L – she was told she could exchange gold ornaments for gold, but no cash. She had the same experience in a few other reasonably sized shops.
I asked a friend who is in the gold jewellery business – and he said there are two reasons:
– the chances of the gold being stolen keeps a lot of shop keepers away from doing the business
– buying gold jewellery makes no sense – simply because it cannot be sold as it is. The gold has to be melted and then reused.
I was quite shocked. Readers of my blog know how anti gold I am – and I am not even saying that you could not have made money from 2000 to 2012….but I was stunned at this ‘illiquid’ asset.
Luckily she was not trying to sell the gold to pay a hospital bill or for her kid’s college fees! She just went back home and looked around for a buyer… – I am doing this post for you to keep checking the ‘liquidity’ angle for the so called ‘liquid assets’.
Please post your experiences…..please do not tell me that Muthoot finance is the only source of getting money against gold!!
pgd73
Hi Subra,
If it is post budget experience it is possible. The information I got is that Importers are stuck with large stocks of Gold to clear from customs while Bullion dealers on strikes across India all the activities are at standstill. So some importers are offering Gold at below landing cost to raise cash & clear their stocks from customs. So in current scenario Gold may remain illiquide.
raj kumar
I don’t think the gold is that much illiquid, in this case your friend might not have the bills of the gold proving her owner ship, any jewellery shop will buy the gold sold by them at market prices or may be two to three percent less, GRT buys gild sold by them with out any hesitation and gives cheque immediately . More over gold can be pledged at any pawn shop or nbfcs or banks and they are happy to lend you at 60 to 70% of the market value. But I do agree that when buying gold or gold ornaments we have to keep in mind that The more we go for studded jewellery we will loose more, while buying pure gold coins they attract merely two to three percent margin, maximum.
Sambaran
Thanks for this post subra. I am waiting for at least one comment which says gold is liquid and easily sell-able.
BTW, any idea how much does manappuram/muthoot pay for gold? Do these companies buy gold or only loan against gold?
Raja
When banks who sell gold coin’s and bars, are themselves not ready to buy back their own stuff even with proper bills… I don’t know, how we can say it’s a liquid asset. Jewellery shops, not sure if they buyback…but it’s definitely at their mercy.
Dheeraj
Once I was sitting on jewellers shop. A lady came to sell her gold ring.. that shopkeeper said, he buys gold sold from his shop only… strange.. Before that day I also used to think that gold can be liquidated any time… and stopped buying gold as investment…
krish
Very timely article for me. I have this dilemma too that whether I can sell my gold for cash during emergency or important needs. Although we don’t have first hand experience but my friends had similar experience. Higher the amount, hardly any takers. My friend wanted to exchange 5L worth of Gold and everyone was pushing him to opt for the loan from NBFCs.
I was recently in the bank and one of the guy turned up to buy the gold as he got land compensation money from the government for road widening. The bank guys lured him to buy the gold showing the carrot of low interest gold loan. To my utter shock, they sold the bars for 20% premium on spot price and sanctioned loan for LTV of 80%. At the time of buying every one is charging premium of 5-25% and at the time of selling it is a discount of 5-10%.
Given the loading during buying and selling, I don’t think it makes sense to buy the gold for 5-10 years. Even if the gold appreciates, it would be breakeven for 5-10 years. However one has to see how it fares for 20-30 years.
Saurabh Aggarwal
Sirji , one has to know the right place to go.Tribhuvan Das BhimJi Zaveri in C.P. Delhi is one such place , the best thing about them is there is no forced selling.Regarding their gold buy back policy , it is very simple.They deduct only making & vat charges and refund the value of gold as on day.
Saurabh Aggarwal
One more thing their making charges on gold coin is 3-4% of the value.
Chandrakant D
whatever different experiences are, Jwellers do hesitate in taking gold from anyone specially when the amount and quantity is high. Even when one agrees, they take a big cut out of it. There is a saying in marathi…”GHAD MOD ani SONAR DHAD”, meaning only Jwellers are benefitted in this business and not individuals like you and me.
Mujahid Ahmed
Very true. Yesterday i went for the exchange of the gold jewellery and some amount of money was spare to be returned by the jeweller. The jeweller plainly refused to pay the balance amount insisting us to buy more jewellery for the balance amount. If this is the case for the exchange jewellery, i wonder what is the case for selling jewellery with all this melting, making charges.
Dr Mohammed Ali Khan
What about Gold ETFs?
Shops in Gulf Countries like Dubai who sell gold as bars, buy them back if the seal is unopened..
subra
Even in ETF please please please be careful and see how well traded is a particular etf that you are looking at….always better to hold small etfs – there is JUST NO liquidity esp in an emergency…:-)
bharat shah
for etf holding one should take into account the expense charged by amc at rate of 1% per year and as etf asset would be in gold form only, it means your gold weight representing unit of etf gold would diminish at rate of 1% which could reduced @17% in 20 yrs , irrespective of gold price. so long term holding of etf is risky , better to have biscuit in physical form and if you can buy and keep 500 gm or so , keep it in sbi, they are paying return of 1% or so per year in form of gold , as i remember . caveat : we don’t have any gold as investment
subra
Absolutely agree with Bharat Shah…try the ‘E-holding’ by buying on the commodity exchange instead of an etf model for the long run..you will lose dramatically in terms of charges in the long run…
Ravinder Makhaik
Somehow the yellow metal never did fascinate me but a large many people swear by Gold
Suresh
ON a slight tangent. the RBI has recently revised loan to 60% of ornament value. How ever I think there is a bubble building here. Already frauds have started appearing in banks and nbfc’s due to sheer volume and lack of sufficient assayers to value gold. When gold prices drop , like a real estate crash, many of the nbfc and banks may have red awash on their b/s.
Keerthi Mukhi
Hi Bharat Shah,
when you say “better to have biscuit in physical form and if you can buy and keep 500 gm or so , keep it in sbi, they are paying return of 1% or so per “year in form of gold”
Could you please eloborate on this? You mean, if I store Gold in SBI Locker then they’ll pay 1% per annum?
Sambaran
What an eye opener this post/comments turning out to be!
I just checked the details of 3 gold ETFs on yahoo finance. The volume for 2 of the ETFs is 0! The volume for one ETF stood at 33! May be I have checked at the beginning of the day which explains the low numbers. I better check back at the end of day too. (However infosys volumes stand at 12992 as I type).
Moreover for none of the ETFs there is any data available for last-3-month average volume. May be it is yahoo-finance’s aggreggation problem.
Moral: I need to understand much much more before I buy gold ETFs. On top of that I am not convinced about gold as an investment in the first place.
Ravi
I differ, Subra.
Gold is pure form of Money. It is the only asset which had maintained and will maintain the purchasing power over long periods.