Gold Buyers Beware
Indians are the world's biggest gold lovers. We account for one-fifth of world gold sales and nearly 70% of this goes into gold jewellery. But the gold jewellery market is so fraught with unfair trade practices that even a sympathetic National Consumer Disputes Redressal Forum could do little beyond questioning if consumers "should be left at the mercy of the traders"?
What should be frightening for ordinary consumers is that the National Forum did not find an answer on a recent case despite its best efforts. Instead, it ended up ruling in favour of the jeweller.

Here is how it began. B S Sharma bought a 23-carat gold ring for Rs 2700 on 16 December 1997. His cash memo said that only 80% of the price would be refunded if the ornament was returned. This suggested that the ring was only 18.4 carats (80% of 23 carat) and it amounted to an unfair trade practice, said the consumer.
Aggarwal Jewellers, who sold the ring, claimed that the value reduction was due to alloys used in making jewellery. The consumer approached the District Consumer Forum through the Akhil Bhartiya Upbhokta Congress, a Bhopal based consumer group. They won the case. The commission directed the jeweller to supply a 23-carat new ring to B S Sharma and pay Rs.5000 as compensation. It also directed the jeweller to ensure that his cash memo claims were accurate. The jeweller appealed to the State Commission (No.1630/2001) which accepted his contention that repurchase of the ring at 80% of its value did not suggest lower purity but covered alloys used in its making.
The consumer challenged the order by filing a revision petition (No.3020 of 2003) before the National Commission. The Akhil Bhartiya Upbhokta Congress said consumers have the "right to be informed about the quality, quantity, potency, purity standard and price of goods to protect the consumer against unfair trade practice." It also pointed out that there is large scale exploitation of consumers in the gold trade and this would continue unless there is proper trade direction to declare the purity or quality of the ornaments.
The national commission agreed that "the amount involved in the dispute is very small, but the matter raises a vital question with regard to purity of ornaments of a precious metal (gold)." It considered the issue important enough to issue notices to the government, the Reserve Bank of India (RBI) and the Bureau of Indian Standards (BIS), to figure out how to protect jewellery buyers. It also appointed an amicus curiae (friend of the court or expert) to help it figure out various issues and arrive at its conclusions. The process onlyexposed how unfair the jewellery business was for ordinary consumers.
The RBI affidavit said that the Bureau of Indian Standards (BIS) was designated by the Government to evolve and operate a hallmarking scheme for gold jewellery, which was launched on 11 April 2000. While this would protect consumers by 'certifying' the purity and caratage of gold, the central bank agreed that consumer awareness about hall marking had to be increased.
The BIS was astonishingly forthright in its affidavit. It explained the international convention that led to the adoption of Common Control Marks (CCM) and later hall marking, mainly to facilitate international jewellery trade. It said that although hallmarking of jewellery was introduced in India, it was mainly voluntary or optional. The Bureau has so far established more than 17,000 Indian Standards, out of which only 100 were mandatory under various government orders and enactments. It also pointed out that its role and powers were extremely limited. It neither has the powers to formulate regulation nor the enforcement machinery or infrastructure to carry out any search and seizure operations, investigations, arrests, recording of statements of witnesses etc. as are conferred on law enforcing machinery of the State such as the Police force. Although it can "carry out inspections and seizures" under the Act, it relies heavily on police assistance.
However, in the last four years, the BIS has recognised 17 Hallmarking centres in 10 cities and certified 750 jewellers. It went a step ahead in 2001-2002 and conducted a survey of eight major cities along with a reputed consumer organisation. Posing as consumers, it purchased jewellery from 15 jewellers in each city and had it tested at the MMTC Assaying Centre in New Delhi.
The findings were shocking. Of the 120 samples, only 14 confirmed to the purity declared by the jeweller in the bill or cash memos. As the National Commission noted, this means that 90% of the jewellery sold in India is not in accordance with claimed purity. The BIS filed complaints against 31 jewellers where the purity was at least 15 % below declared caratage. In September 2003, the Ministry of Consumer Affairs constituted a commission to "contain and control the alarming situation" in sale of jewellery and introduce hall marking, especially in rural areas.
The BIS's affidavit dated 13 April 2004 makes some interesting points too. It says Indians culturally have a 'great fascination for gold', so much so that it is seen as a commodity and not a product. To them, gold in any form is "homogenous and indistinguishable" with “no brand or expiry date”. Hence, gold demand is not “price-elastic” but “prosperity elastic” - that is, increments in household income are generally matched by purchases of more gold.
But the consumer is victimised over quality. A person buying 22 carat gold will discover it is only 18 carats when he tries to sell it, but since Indians emphasise on 'high carat' jewellery (which is also seen as an investment), hall marking was a solution but its roll out was difficult. Having heard all sides, the National Commission concluded that hallmarking gold jewellery is a necessity, but there are several difficulties. It also noted that the trade was fraught with "large scale unfair trade practices" and consumers are at the mercy of the jewellers. One of the main objectives of the Consumer Protection Act, 1986, is to see that consumer gets information with regard to quality, quantity, potency, purity, standard and price of the goods. This object of the Act is apparently frustrated.
On the specific case however, the Commission accepted the jeweller's contention that the 20% reduction in value covered "inputs like labour charges, sales tax, cost of unrecoverable linkage used to make ornament, labour required to be paid for refining and reclaiming gold, wastage or impurity developed due to use and exposure of the metal". Meanwhile the consumer had another test report which showed that the ring contained 21 carat gold, which weakened its case.
Consequently, the National Commission presided by M B Shah and Rajyalakshmi Rao (Member) only directed the jeweller to emboss a marking on his jewellery indicating its quality/purity. Further, it said that until hallmarking is made mandatory, government should issue "appropriate directions" under various statutes to see that jewellers have their identification marks clarifying quality and purity of gold. This protects the consumer in case of discrepancies when he tries to sell the jewellery. The Commission appreciated the consumer’s zeal in fighting this issue which helped highlight the unfair trade practices in the jewellery business. It must however be mentioned that top Indian jewellers do emboss their jewellery and do not quibble about purity when it is re-sold. It is up to the consumers to help clean up the trade by sticking to established jewellery brands that guarantee purity and caratage.
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Gold as investment? Think again

Gold has now crossed $600 and gold bulls are hopeful that at this rate it will cross the old high of $850, made sometime in early 80s. Will it and if it does, what are the other implications? Is gold a good investment at the current levels? Remember, unlike other financial assets, gold does not pay interest or dividend. Besides, in inflation-adjusted terms gold has not been a great performer. During a period of economic prosperity, gold can go down quite a bit in a continuous fashion over years. Newspaper headlines are screaming now that gold prices have reached 20-year highs in dollar terms and so on. The fact is, it has grown just 10% in these 20 years. The real rise has happened after April 2001, when gold hit $256. But if you bought gold in April 1989, you would have paid $400. By 2001, 12 years later, the loss would have been 35%. Of course, this is a comparison in dollar terms.

With a steady devaluation of rupee, price of local gold would have stayed up. Like most other financial products, there is a time to own gold and there is a time to stay away from gold.

So, the key factors to consider while guessing the price of gold are (apart from the movement of rupee vis-à-vis dollar) estimate of inflation vis-à-vis interest rates and of course estimates of physical demand and supply of gold. Too many complex and global factors are embedded in the price of gold. Not only is it impossible for individual investors but even for teams of experts to get all these elements right to make any worthwhile bet on the direction and magnitude of gold prices. Most importantly, there is little transparency in the large physical demand and supply of gold involving central banks, hedgers and actual users. Gold rises on demand and supply factors such as central banks, hording lots of gold, deciding to sell, depressing prices. But as a thumb rule, it is the expectation of higher inflation worldwide that pushes up the price of gold.

If you want to buy gold for large returns, be careful what you wish for. You would be betting that the world is facing difficult times. When all other asset classes are doing badly, gold will be a top performer. When interest rates are higher than the inflation, gold is not preferred because gold pays no interest. But if interest rates are close to inflation or below, gold is a preferred asset. This is so because inflation eats up the actual earnings power of interest income and reduces the value of financial asset. Suddenly, gold becomes important in those times.

But if you believe that India is a growth economy you may well find yourself in the position of the US investor in 1980. In January of 1980, the Dow Jones Industrial Average was 850, and gold was at $850 an ounce. In 2006, Dow is at almost 12000 and gold is at $600. If India keeps growing and its currency remains stable, stocks will outperform most asset classes and gold will not do too well, whether we have a bull run in commodities or not.

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