Dubai: It would be immensely profitable to own huge quantities of gold in the form of jewellery, coins, or bars, but it’s also just as hard to do so given the high prices of the yellow metal. This is where gold-based savings schemes can come handy, but are they really worth your money?
“Jewellers worldwide – albeit more so in India and the UAE – often come up with schemes where you buy gold ornaments after paying for it in a staggered fashion. The upside is affordability, but it may not always save you money,” said Georgina Effel, a Dubai-based precious metals retail analyst.
But first, how exactly do gold saving schemes work? A typical scheme allows you to deposit a fixed amount every month for the chosen period. When the term ends, you can buy gold (from the same jeweller) at a value that is equivalent to the total money deposited, including a bonus amount.
“With gold saving schemes, your cash instalments are converted to gold at the market price seen at the end of your deposit term. However, in most cases, the jeweller adds a month's instalment at the end of the tenure as a cash incentive or may even offer it in the form of a gift item,” explained Effel.
On a monthly basis, if you invest Dh200 or Rs4,500, or its equivalent in the currency you are paying with, every month according to your preferred the scheme, after 11 months you would have invested Dh2,190 or Rs49,500.
The retailer will then put in an additional Dh200 or Rs4,500 as the last instalment. So, you will be able to buy jewellery worth Rs54,000 by paying only Rs49,500. Effel added jewellers either incentivise with up to 90 per cent of the last instalment or add it to the value of the gold at the end of the term.
Gold savings scheme buyers have more to lose than to gain
While the merits of a gold jewellery scheme seem lucrative at first, a key factor to keep in mind is that an investor can use the same amount for the purchase of jewellery only from the same jeweller. This limits your options and if you don’t find what you want, you can’t get a refund of your deposits.
“There are a lot of restrictions to using gold savings schemes like going to the same jeweller to buy gold,” said Zubair Shakeel, a UAE-based investment manager with a focus on gold assets. “Also, the price invested in this scheme can be used for buying only jewellery, not coins or bars.
“If you buy jewellery for higher amount than the amount accumulated, there are chances you will lose the perks available to the scheme, such as lower making charges. Also, you’re eligible for a bonus only when you’ve paid the instalments in full and not if you discontinue it in between.”
Another significant setback in the gold saving scheme is that the jeweller offers only a fixed value on when you have paid your instalments. Unlike gold funds where the returns can go up with higher gold prices, most gold saving schemes offer you the same value of jewellery at the end of the term.
Gold saving schemes are lower than digital gold investments
“The return on investment in gold savings schemes are much less than digital gold, and there can be some hidden details of the scheme, which the investor might not get to know before investing,” said Effel.
Digital gold, also referred to as ‘DigiGold’, is a method of investing and buying gold online without literally holding the gold yourself. Each unit of digital gold is backed by 24-karat 99.9 per cent purity gold and you do not take possession of the gold you buy, with the ‘storage’ done elsewhere.
When you feel it’s time, you can sell the gold ‘holdings’ at a time you choose. The key perk is that you can buy gold from as low as Dh100. Also, the purchase and sale happen online at market prices. With the asset for these investments being physical gold, you get returns according to its spot price.
“The only major benefit you get from the gold jewellery schemes is that you can pay in instalments for the gold and keep the money intact for the same. A lot of people purchase gold jewellery schemes because it lowers the burden of paying the whole amount at once,” added Shakeel.
The return on investment in gold savings schemes are much less than digital gold, and there can be some hidden details of the scheme, which the investor might not get to know before investing
Gold saving schemes require you to periodically deposit money with jewellers in order to buy ornaments after a fixed time period, while offering regular savings by investing in gold after a period of time. However, the negatives are many.
A key drawback is that you are not allowed to purchase the jewellery you saved up for from a different jeweller. Also, you cannot buy the gold at an average of the prices recorded during your investment period, but at the prevailing market price, which may be higher than the average price.
This raises your risk and chance for losses. Further, you are bound to follow the jeweller’s terms and do not have the freedom to compare charges or designs with other jewellers. Additionally, the bonus you get, if any, depends on your prompt payment of instalments.
Further, this scheme results in purchase of jewellery only and does not give cash benefit in your hands. “Gold saving schemes which allow immediate conversion to gold is better than the option where conversion takes place at the end of the period, protecting from price rise,” noted Effel.
Shakeel opined that these schemes may not be good for you if your sole purpose of buying gold is as an investment. “In such a case, you can opt for digital gold instead, or even physical gold investments made in gold coins or bars which do not entail making charges,” he added.