Gold monetisation, bond schemes: Will they work?

While the yellow metal is a hedge against inflation, sentimental attachment to it doesn’t mean households will refuse to explore the potential for monetisation.

Gold rate
Bullion traders said gold rose from a 5-year low in a firming global trend. (Express Photo)

Prime minister Narendra Modi has announced that on Dhanteras (Diwali eve), the government will launch two gold-related schemes to tap household stocks of over 22,000 tonnes and reduce imports. The gold monetisation schemes (GMS) will tap household gold stocks and the sovereign bond scheme would help reduce the physical demand of gold for investment. Customers can open a gold savings account with a bank and earn tax-free interest on gold assets like bullion or jewellery.

The Reserve Bank of India (RBI) has issued a circular for implementation of the gold monetisation scheme and banks are now putting in place the requisite processes for implementation. Finance minister Arun Jaitley first mentioned the scheme in his FY16 Budget statement, but it was announced by the ministry later, in September 15.

What is the gold monetisation scheme?

Resident Indians (individuals, HUF, trusts, including mutual funds/exchange traded funds registered under Sebi norms) can make deposits under the scheme. The minimum deposit at any one time will be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of the precious metal of 995 fineness. There is no maximum limit for deposit under the scheme and the metal will be accepted at the Collection and Purity Testing Centres (CPTC) certified by the Bureau of Indian Standards. The designated banks will accept gold deposits for the short- (1-3 years), medium- (5-7 years) and long-term (10-15 years) and are free to fix the interest rates on these deposits.



What will banks do with the gold?

Banks will melt the gold and get a value from BIS-approved hallmarking centres. Both principal and interest payment to customers will be valued in gold and the interest on the gold deposits will be decided by the bank. Depositor’s preference to either redeem the interest in gold or cash will have to be stated at the time of deposit. The purity of the gold will be tested at the hallmarking centres in the country. An XRF machine-test will be conducted to value the amount of pure gold. If a customer does not agree to the machine test, she can take back the jewellery. After the consent of the customer is taken, the ornament shall be sent for melting and the net weight will be calculated. If the customer is not satisfied with the value after the fire assay test, she can take back the melted gold in the form of gold bars after paying a nominal fee to the centre. If the customer agrees to deposit the gold, she will be given a certificate by the collection centre certifying the amount and purity of the deposited gold.

How would the interest be paid?

Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradeable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier.

How is it different from Gold Deposit Scheme (GDS)?

The existing scheme, introduced 16 years ago, mobilised only 15 tonnes of gold—as the minimum deposit was 500 grams and the interest rate was a mere 0.75% for a three-year deposit. Though the government has reduced the minimum quantity of gold that a customer can bring to 30 grams, banks will have to give an attractive interest rate to attract retail investors into the scheme. Deposits outstanding under the GDS will be allowed to run till maturity unless the depositors prematurely withdraw them.

Will the new scheme work?

That is the million-dollar question. First of all, the scheme’s success will depend on the attractiveness of rates offered by banks. Retail investors will also need a guarantee that the tax officer will not come calling on the depositor. The scheme—as proposed—requires the depositor to show a receipt of purchase. Also, the depositor should have the flexibility to decide on maturity depending on his needs at that point of redemption. While gold is a hedge against inflation, sentimental attachment to gold does not mean households will refuse to explore the potential for monetisation of gold assets. A Ficci-World Gold Council study shows consumers are willing to consider interest-bearing gold-based investment products, even if the gold received at the end of the tenure is different from what they had deposited. Nearly two-thirds respondents said they would be happy to receive different gold from their initial deposit, while 62% said they would prefer cash or Indian branded gold coins upon maturity. Only 8% said they would prefer to have their original gold returned to them. Analysts say interest rates of 2-3% will pull investors into the gold monetisation scheme. If the scheme works, it could increase the recycling of domestic gold, monetise some physical savings of households and reduce dependence on gold imports.

Why is gold losing its lustre?

Gold prices are falling because of lower demand in India and China—the two largest consumers of the metal. From a high of $1,900 per troy ounce in May 2011, prices have fallen to around $1,165 per troy ounce in October this year. As a result, the 5-year CAGR returns of the metal is 9.34% as compared with close to 11% returns in real estate (NHB index NCR). With the US Fed likely to raise interest rates first time in nearly a decade, the fear of recession in the world’s largest economy is easing and global stock markets are moving up. If the US raises rates, interest income from US bonds will also rise and investors moving away from gold to bonds and stocks. Also, central banks, especially from emerging countries, are buying less.

What are gold bonds?

An investor can buy Sovereign Gold Bonds in denominations of 5, 10, 50 and 100 grams of gold. The tenure of the bonds will be for a minimum of 5-7 years to protect from volatility in gold prices and on maturity, the redemption will be in rupees. One can take loans against these papers and trade these papers. An investor who buys gold bars and bullion purely for investment purpose would find the bonds attractive.

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