Is buying jewelry an investment?

It’s the wedding season, and I get to go to my share of them. I am always amazed at the amount of gold (mostly in the form of jewelry) that is bought for weddings and the find justifications for this interesting. One of the most common justification is “it’s an investment”.

Well, the word investment always gets me interested, as I am keen on not missing out an investment opportunity. I thought of doing a bit of research to gain a better understanding. I was bamboozled by the jargon – purity (which ranges from 91.6% to 75%), making charges (which ranges from 2% to 40%), wastage charges (which ranges from 0% to 15%), cost of precious stones etc. All these end up being the cost of purchase. These costs vary widely from one seller to another. I was not sure I was getting anywhere with my research to understand the cost of purchase. Then I decided to go back to the things I understand well – I decided to take a look at the P&L statements of the top few listed jewelers and understand the costs that are passed on to an average customer.

The average margins for top Jewelers are about 15% – which I think is really not bad.  This means, if one is paying Rs 100 for an item, this includes Rs 15 as costs. And the value of the item is really Rs 85. Now here is the rub, if one were selling it “almost” immediately the cost of selling is anywhere between 5% and 15%. If we take an average of 10% then the value one can get after selling it is about Rs 75.

One would lose a similar 25% if one were to purchase a car and then sell it “almost” immediately. But no one calls buying a car an investment. The only reason one calls gold “an investment” is that there is an “expectation” of appreciation of gold prices. In this case, gold price needs to appreciate by 33% just to break even (i.e., get back Rs 100 spent on purchase).

Transaction costs – cost of purchase and sale of an item – of 25% makes the jewelry a highly risky investment at best.  I am not sure one can call purchasing jewelry as an investment. One may be better off looking at is as paying a “rent” of 25% of the value of the jewelry for the joy of wearing it.

Weddings are special events and there is no tangible way of putting a value on joy, it is specific to individuals and their circumstances.

Weddings involve various expenses as one is inviting and entertaining friends and family. The money spent on the food, clothes, venues etc., is rightly treated as an expense. In the same vein, I think, one would be better of considering purchase of jewelry as an expense of 25% of the value of the jewelry rather than an investment.  This might help in making more informed choices about the amount one wants to spend on jewelry.

 


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About Praveen Reddy

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