Dawn of the golden age

Investing in the yellow metal may soon become more lucrative. Even as buying gold for future use has always been considered good, storing it is an issue.

Investing in jewellery per se does not make sense. If you decide to sell it, you get an amount 15-20 per cent lower than the market rate of physical gold. While 10 per cent is deducted as making charges, another 5-10 per cent is reduced because of tax and discount on old gold.

But things are likely to get simpler. Financial Technologies-promoted National Spot Exchange (NSEL) plans to introduce an e-gold conversion facility. This will allow buyers to purchase physical gold in the electronic format, store it in a demat account and convert it into jewellery as and when they wish.

As Anjani Sinha, managing director and CEO, NSEL, puts it, "Next month, we will commence talking to jewellers with BIS hallmark or any other trusted hallmark facility. We plan to engage at least 10,000 jewellers across the country by the end of the current financial year."

The best part is that the investor will get a higher carat on conversion to jewellery. For instance, if an investor purchases gold coins of 10 gram, and wants to convert these into jewellery, he/she will get an additional 10-15 per cent, depending on the ornament's carat value.

This is because the carats of gold jewellery will always be lower than gold coins. There will be a making charge of Rs 50-200 a gram.

While NSEL's move is meant primarily to increase liquidity at the exchange, long-term gold consumers can also benefit. Remember a gold demat account has to be opened with the brokerage, which will trade through NSEL.

Even World Gold Council (WGC) is planning to engage jewellers to redeem physical gold as jewellery. Although jewellers accept physical gold and convert it, there is no set procedure. Often, a physical gold owner sells it first, and then purchases jewellery with the proceeds.

While selling coins or bars, jewellers often pay lower than the market price. And while purchasing the jewellery, there is a making charge over the market price.

WGC's plans, if implemented, will help reduce the time as well as the transaction cost. "Talks are already on with jewellery retailers across the country. The list will be finalised by March 2011. The proposal will be operational in the next 12-18 months," says Ajay Mitra, managing director (Asia Pacific), WGC.

Even the jewellers seem enthused with this proposal. "If the redemption option is available for investors, the demand for both coins and bars will increase," says a Mumbai-based retailer.

In the nine-month period ending September, however, the investment demand for gold doubled - from 65.8 tonnes to 136.9 tonnes in the same period the previous year. Similarly, the total demand for gold jewellery remained robust, recording a rise of 73 per cent at 513.5 tonnes, as against 297.2 tonnes in the year-ago period.

While opening the account is free, there is an annual maintenance fee of Rs 300. In addition, when you transact, there is a brokerage fee of 0.5 per cent.

As far as taxation goes, if you sell gold in less than three years, the proceeds are added to the income and taxed, according to the slab. On the other hand, if you were to sell it after three years, the taxation will be 20 per cent with indexation benefits.

However, since you are converting gold directly into jewellery, there will be no taxation.