Getting it right on gold: Rejig bond or monetisation schemes to make them work

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October 6, 2020 6:00 AM

Rejig bond or monetisation schemes to make them work

In this case, too, apart from the loss in value if ornaments are being given instead of coins/bars, there is the issue of the taxman.In this case, too, apart from the loss in value if ornaments are being given instead of coins/bars, there is the issue of the taxman.

Given that the two major gold schemes of the government—one for monetising gold assets and the other a bond scheme—have mopped up just 51 tonnes of gold over the past four years, they have been a spectacular failure. To put the 51 tonnes in perspective, Indians bought 2,888 tonnes of gold during this period; the two schemes have fared slightly better when it comes to investment demand—a total of 639 tonnes of coins and bars were bought in the same period—as they mopped up around 8% of the total purchases.

And it helps that, as compared to the heydays of 2012 when Indians bought 914 tonnes of gold, demand fell to just 690 tonnes in 2020; in the first six months of the year, from January to June, demand collapsed to 166 tonnes. But even if gold imports are 6-7% of total imports right now—they were 2.8% in April to July 2020—as compared to 11.6% in 2012, that is still a large enough amount to want to do something about it.

While gold bonds have been more successful than gold monetisation schemes—they mopped up 30 tonnes in the last four years compared to 21 tonnes for gold monetisation schemes—the problem is that they are badly designed. For gold bonds to work, they need to mimic gold in every way; they have to be liquid and anonymous. Unlike gold that can be bought on tap, gold bonds are sold as per an RBI-declared calendar; instead of their prices being the same as gold at the moment they are bought or sold, the bonds are traded at the average value of the last five days, thereby ensuring those buying / selling can lose a significant part of the upside.

Indeed, while even today, gold can be bought at jewellery shops without necessarily declaring their full value—though the law demands this—the same cannot be said about bonds. An added complication, even if it does not apply right now, is that the government is not actually buying gold to match each purchase of bonds; should the scheme take off, and people want to redeem their investments in the form of gold, the government will have to buy gold to make good on its promises. Ideally, gold futures should be bought to ensure there is no mismatch each time gold bonds are bought.

The problem with the gold monetisation is even more acute. In principle, with households sitting on an estimated 25,000 tonnes of gold, there should be plenty to monetise. But to do so, individuals—or temples or trusts with gold—need to have their gold melted and, in most cases, this will result in a 5-30% loss in value; and since there aren’t enough assaying facilities, getting to know the gold content of the ornaments is also a tedious task.

In this case, too, apart from the loss in value if ornaments are being given instead of coins/bars, there is the issue of the taxman. While the taxman will not ask any questions if the gold being deposited is under 100 grams, the fear of the taxman’s inquiries—on amounts larger than this—is another reason that is responsible for the poor response to the scheme.

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