Gold ornaments on display at a store in Dubai's Gold Souk. Image Credit: Zarina Fernandes/Gulf News

The recent decline in gold prices has created a stir among jewellery fans in the country. Since prices started a downward slide a couple of weeks ago, there has been frenzied buying of gold jewellery at different shops in UAE.

Expatriates in the country, particularly those from India and the Philippines, have a long tradition of hoarding gold jewellery as a form of investment or personal saving.

It is their common belief that storing jewellery offers more security than keeping cash in the bank and is an effective hedge against inflation. For many gold aficionados, the precious metal can provide much-needed relief during emergencies, such as when a family member needs urgent medical assistance, the daughter’s school tuition or the mounting household bills need to be paid.

Many women, in particular, find gold much more appealing than other luxury items due to the metal’s unique attributes: perceived longevity, purity and value.

A few years back, independent research firm, GfK, surveyed more than 1,000 American women aged 16 to 65. It found that gold jewellery maintained its appeal even in times when women had to tighten their purse strings. It’s the third most popular item that a woman would choose when spending her discretionary income.

“A number of attributes were identified that make gold unique,” the World Gold Council said in a report. “It has a perceived longevity, purity and value that set it apart from other luxury goods and a clear differentiation from other precious metals and stones that is derived from its associated and relatively transparent investment value.

“At the same time, gold’s aesthetic qualities are acknowledged as versatile and suitable for everyday wear. In contrast to gold jewellery, which has clear financial value, other luxury consumables were viewed as having short-term aesthetic appeal and therefore lacked the investment value and the longevity of gold.”

However, is jewellery the best way to make money out of gold? Can it provide returns higher than stocks or property? Will the bracelet you bought from Gold Souk last week earn you considerable profits if you sell it when the gold price goes back up?

Last week, I met a couple who were actively looking for investment options, including real estate. I asked them if they had other ways in mind to preserve wealth. The wife promptly answered that she’s “investing” her spare money in gold jewellery.

When pressed for more details as to what led them to believe buying jewellery was a profitable move, the husband recalled a time he bought a piece of jewellery in Dubai worth Dh500. When he ran out of money while visiting his home country, he made a dash for the nearest shop and pawned the piece for some quick cash. “I got Dh500 in return. And I didn’t even sell it yet. I would have made more if I had sold it,” the husband said.

If you ask the sceptics, you will likely get a different answer. Steve Gregory, a managing partner at Holborn Assets, was quick to say he’s not much of a gold jewellery fan, “except where it’s very high end and can be sold because of its uniqueness and quality regardless of the actual price of gold.”

Gregory argued there is no income to be made from gold, unlike almost every other asset, such as bank deposits, share investments or property.

”Without income, an investment relies on capital gains alone, and too often losses can be taken instead of gains. Without income, there is little chance of beating inflation as it is the combination of growth and income that defeats inflation,” he said.

Unlike gold coins and bars, jewellery carries additional charges that makes it more expensive to buy in the first place. The additional costs also mean you may not be able to recover your capital even when the prices go up.

Jewellers normally collect charges to recover the labour cost of crafting a shiny necklace, ring or bracelet out of raw gold. Then there are ‘wastage charges’ to cover for the amount of gold that is wasted when the precious metal is cut, melted or soldered.

When it’s time to ‘cash’ your most prized possession, your jeweller might not repurchase it based on the spot gold’s current market rate, because he will likely quote the wholesale rate or deduct the making and wastage charges from the price. The wear and tear on your jewellery can also depreciate the resale value.

It is important to take these considerations into account before choosing jewellery as an investment vehicle. If you really have to buy into the craze, the least you could do is ask your vendor if they can guarantee that they will repurchase the item without chopping off the making and wastage charges. Opting for unique design and good quality might also help fetch a good resale rate.