Why is gold jewellery unsuitable as investments - do you know?

My Mentor, Tuan Zulkifli, shared a story about a lady seeking gold investment advice. She disclosed that she had spent about RM 30,000 on gold jewelleries. Upon checking the price point when she made the purchase, it was known that she had paid a premium of 15% as compared to the standard gold price (either gold bar or gold coin). She was behind profit by 15% due to the poor provider selection, and with a spread margin of 25%, she is in loss twice as much. 

Honestly, her case was not the isolated cases happening around us. So many people out there got excited about investing gold and ‘pumped’ their money without doing the due diligence. Some even got influenced by the gold agent chanting ‘gold price never drops’. This was how the lady in the story earlier fell into the trap.

The loss observed in gold jewelleries

So, the advice given to the lady in the earlier story was to hold on to the jewelleries and not sell them just yet. This is with regards to why is gold jewellery unsuitable as investments. The downside is that while others might have enjoyed the profit potential, she had to wait for a longer duration (a few more additional years, at least) to realise her profit. 

1. Costly price per gram

The gold shop owners’ association typically dictates the gold jewellery price. It is always higher than investment-grade gold items (gold bar or gold coin). You could always verify by visiting your local jewellery shop and finding out this information. Then, compare the info (the gold price) with other gold companies such as Public Gold or the Kijang Emas gold bullion (Maybank).

The final cost has increased even more with Goods and Services Tax (GST) being charged on gold jewellery items. The exciting thing is that GST is not imposed on investment-grade gold items. When the GST is not charged on such gold items, the final cost is lower than gold jewellery items. Hence, getting investment-grade items for long-term savings is cost-effective while providing a higher profit potential.

2. High spread margin

Spread margin simply refers to the difference between the buying price and selling price, and this is one crucial factor that determines how quickly we would profit and to what extent the profit might be.

The spread margin is typically between 25% to 40% for gold jewellery items. If the gold price appreciates by 15% with a 25% spread margin, for instance, the jewellery owners are still in a net loss of 10%.

However, the spread margin is typically about 10% for investment-grade gold bars. Furthermore, it should be noted that the bigger the gold item, the lower the spread margin. Based on the same example above, the net profit potential would be 5% with 15% gold price appreciation. Gold savers can smile upon realising this, and by waiting for a longer time, their profit potential might grow even further.

3. Workmanship cost being manipulated

If we were to visit a gold jewellery shop, we would notice that the gold price displayed typically excludes the workmanship costs. This cost is incurred due to design, and the cost gets higher if the selected design gets more unique.

Since there is no gold standard in workmanship cost, we are left at the mercy of gold jewellery shop owners in dictating the overall price of our gold items. This means that the gold jewellery shop owners manipulate the workmanship cost.

If the gold price is comparatively higher, the workmanship would be adjusted to a rate lower than usual. On the contrary, if the gold price drops by a considerable margin, workmanship cost would be changed to a higher rate than normal. In other words, we are still paying at a higher cost irrespective of the gold price.

4. Delay in gold price revision

If you notice, the price of gold jewellery remains ‘static’ most of the time. However, when the gold price shoots up, the gold jewellery price would quickly be adjusted to a higher level. But if the gold price drops, it may take a while before the gold price gets reflected accordingly. It may take a few weeks before an adjustment is made.

Price revision every 20 mins

This is the opposite with investment-grade gold items, where the price is revised daily. Public Gold is one such provider in this region where the gold price is actively adjusted closely, mimicking the market gold price. The frequency of price revision takes place every 20 minutes or approximately 72 times a day, which is done to mimic the market gold price closely.

This allows us to ‘lock the price’ based on gold price movement for both buying and selling. Such a mechanism is useful, especially for gold traders who wish to leverage gold price movement, and this feature is not available on gold jewellery, unfortunately.

Criteria of high valued gold jewellery

Firstly, do not trust the gold agents blindly. The best way is to acquire as much information as possible. And before deciding, take a ‘buffer period’ to think it through. Use this time to verify the claims so that the agent's credibility can also be checked. Look at their social media profile and look at their posts. If they are serious about their products, they post on their profile and talk about it.

After considering  a buffer period

Secondly, if you consider getting gold jewellery for decoration purposes, there are a couple of criteria to note. The most important one is that the buyback price of the item must be comparatively higher than other jewellery types.

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Hope you find it useful.

Your buddy on gold investing,

Naresh G