Dhanteras: Why buying gold coins for investment is not a good idea

Gold bought 10 years ago has yielded a compound annual growth rate (CAGR) of about 11%, whereas CAGR for the five-year period stands at 14.2%. 

During the five-year period, the precious metal has not only beaten inflation but has also kept pace with the Nifty 50, which has risen nearly 15%. 

However, most Indians who bought gold on Dhanteras each year over the past decade would not have clocked the same net returns. This is because people usually buy gold as coins or jewellery—the least efficient form of the metal.

Young consumers, especially, are increasingly flocking to gold coins, as they are readily available through online retailers such as Amazon, Flipkart, and even Swiggy Instamart. 

The openly hidden charges

Mint’s calculations show that the appeal of gold fades when it is bought in the physical form. Say you bought one 10-gramme 22K gold coin each year on Dhanteras over the last five years. While you have spent about ₹2.64 lakh (including making charges and 3% goods and services tax), the current value of these coins is ₹3.65 lakh, an impressive 11.6% internal rate of return (IRR). 

However, the value of gold coins is realized when you cash them out or use them for making jewellery. In the first option, jewellers take a 3-5% cut to pay cash for gold coins. Assuming the jeweller takes a 3% cut, your IRR on cashing out the coins declines to 10.49%. 

To make jewellery, additional making charges and 3% GST are to be paid. Making charges of some of the reputed jewellery brands, such as Tanishq, Malabar, Kalyan Jewellers, etc., range from 7% to 30%. Assuming a modest 12% making charges, you will pay about ₹56,000 extra to use coins to make jewellery. In this case, the IRR on gold coins works out to only 5.57%, almost half of the unrealized value of the coins.   

To be sure, the net return would be higher if you bought the gold coins from a local jeweller who doesn’t levy making charges. But such purchases are tricky for many reasons. One, big jewellery brands don’t accept gold coins from other jewellers, which means you can return these only to the same jeweller. Second, small jewellers rarely agree to cash out gold coins unless it’s a family jeweller with whom you have a long-standing relationship. Even in such cases, they take a much higher 5-7% cut.   

Calculating the returns of coins is purposeless if you buy them solely in keeping with Dhanteras tradition and intend to use them in the future to make jewellery for consumption.    

For investing, gold exchange-traded funds (ETFs) are a better option. In the above example, Mint’s calculations show that instead of buying gold coins each year, if you invested an amount equivalent to the price of 10-gramme gold each year on Dhanteras in an ETF, the IRR on such an investment would be 15.11%. This is almost equal to the rise in the Nifty 50 over the same period.