Gold is Illiquid

i am not sure whether this is a one off experience or true across many locations…

In chennai when a friend tried to sell gold worth Rs. 3L – she was told she could exchange gold ornaments for gold, but no cash. She had the same experience in a few other reasonably sized shops.

I asked a friend who is in the gold jewellery business – and he said there are two reasons:

– the chances of the gold being stolen keeps a lot of shop keepers away from doing the business

– buying gold jewellery makes no sense – simply because it cannot be sold as it is. The gold has to be melted and then reused.

I was quite shocked. Readers of my blog know how anti gold I am – and I am not even saying that you could not have made money from 2000 to 2012….but I was stunned at this ‘illiquid’ asset.

Luckily she was not trying to sell the gold to pay a hospital bill or for her kid’s college fees! She just went back home and looked around for a buyer… – I am doing this post for you to keep checking the ‘liquidity’ angle for the so called ‘liquid assets’.

Please post your experiences…..please do not tell me that Muthoot finance is the only source of getting money against gold!!

 

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34 Responses to “Gold is Illiquid”

  1. @Keerthi Mukhi
    i was referring sbi’s gold deposit scheme, where you have to deposit minimum 500gm gold in form of bullion only(i mean, no ornaments) for 3-5 yrs period and you will be paid back the principal gold and the return @1% or @1.5% of gold weight cumulative, but paid in rupee cash form at end of the period. this is as per my memory. whether the scheme is running and other clarification contact the bank.

  2. ETF is not gold.it is a human construct.just as much as a satyam share.GOLD ORNAMENTS may be illiquid. bars and biscuits,not so much.there is too much adulteration and impurity in ornaments for it to provide very easy liquidity.ask a greek govt bond holder if they’d take that gold instead of paper

  3. partially agree with Pravin. Etf is synthetic. However in India mutual funds are supposed to have exactly the said quantity of gold in physical form. How many trustees and directors are diligent in their duties I have no clue. In God we trust.

    Personally I will not mind etf for taking a short term position, but for a longer term hold, would prefer the old fashioned biscuit kept in a locker. Will not worry too much about insurance and storage costs.

  4. Subra, you said that you will prefer old fashioned biscuit kept in a locker.
    However, what will you do with that biscuit? It seems, you can only take it to a jeweller and get jewellery. If you have no interest in making jewellery out of that biscuit, there is precious little you can do apart from taking a loan from muthoot/manappuram/local-pawn-shop. Selling a golden biscuit/coin in lieu of cash is not easy, it seems.

  5. @ sambaran
    as i understand from my own experience to sell gold ornaments of my relative after her death , there are the traders who are buying, but only after liquifying and remoulding it into bar , and getting its purity at the firms doing that business only. generally if i am correct, they are paying price for 1-2 carat less than the actual. and what i understood from the experience that this is also beneficiary to the seller compared to sell the ornaments intact( in that case also the purity is got checked by the same m/c /instrument, but the deduction would be more) whereas for biscuits, i think, there is purity certificate most of times and it will be found correct , if it is bought from authentic source. of course you may get price for 1-2 lower carat, but that i think, is trader’ profit. yes, it seems too much (4-8%) to me also. but this is just what is the practice of the market , as i understand!

  6. @bharat shah
    Thanks for your comment. Where can I find the traders you are talking about? Are there reputed chain/brands who buy back gold and give cash in return? Google did not help me get any such outlet in bangalore.

  7. Ahh I forgot one thing.. non-branded gold ornaments are bought from 20-30% deduction while hallmarks one sold after 10% deduction and can be exchanged with any other jewellery as it is with no deduction…

  8. Sambaran
    i am talking about traditional shops/traders available in probably in every big city’s gold market, where they are separately doing liquifying -remoulding gold ornaments into gold bars, then others having checking the gold bar or even any gold ornaments , and then finally traders buying such gold/gold ornaments for cash. thus you have to go to three shops of the same area and it may take couple of hours of the same day. i am aware about ahmedabad, and such shops are available in its manekchowk area. the rates of liquifying gold and checking its purity are fixed and sometimes written in the shop.

  9. i think this is the same story as any other asset – when we buy, we refuse to ask the basic question – how/where/when can i sell? it is important to know that, even if you don’t intend to sell it forever.
    the mistake in gold has perhaps be repeated in real estate, illiquid shares, convertible debentures, listed bonds, et al…

  10. Interesting post.

    Question: I heard that Gold Coins are more liquid than Gold Jewellery. And these coins can be sold at/close to spot market rate.

    Is this really true? Any experiences?

  11. @Guest (of 10th November 2012),

    I do not know of any reputed pan-Indian brand which agrees to buy gold and give a cheque in return.
    To me this ‘illiquidity’ of gold is one of the big reasons for not investing in gold.

  12. @Sambaran

    Thanks for your reply.

    I’m still digging – here is something in the meantime:

    http://www.traderji.com/metals/18458-gold-bullion-how-can-retail-investor-sell.html

  13. @Guest (of 14th November 2012),

    The bulletin board at traderji.com was very depressing indeed. I fully shared the frustration/anger of the person who posted the question there (he was a potential seller).
    So gold in bullion form has the con that you cannot sell it in a respectable manner to get cash.
    On the other hand ETF has the con that per year it shaves of 1% (atleast) of gold by weight from your account as asset-management-charges.
    What dilemma!

  14. the problem of sale of physical gold , which is mentioned on traderji.com , is ,i think, of period 2007, and for that particular city.the things are changed much in 5 yrs since then. now purity checking is not that difficult, and if you have surety of purity of gold, you can get it en cashed with reasonable rate.moreover ,when you buy gold for your own use, say, for child marriage on future date, there would not be any problem of such distress sale.on other hand , for gold etf, you should be sure to loose definite quantity on latter date.

  15. […] to get a compounded ROI. You also remain liquid, since real estate investment is least liquid, after Gold. The long term investments in equity and equity mutual funds are tax free. This helps in your tax […]

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