We (Indians) love the yellow metal (gold). India’s love affair with gold has been since ages. From times immemorial, gold has been seen as a safe investment, especially when there is an economic crisis. Most of us are emotionally attached to buying / accumulating gold. “It’s an emotional, sentimental and religious purchase.” Gold has been preferred by governments also, as a collateral against any crisis.
India reported 3rd highest demand for gold in 2013, which was around 25.2% of world demand (in-spite of import restrictions & high import duties). We do not have our own gold reserves / mines to produce it. So, we have to import from overseas markets. Nearly 95% of our annual gold demand is met by imports. Annually, we import anywhere between 800-1000 tonnes (out of this, around 350 tonnes of gold is in the form of coins/bars). These imports (along with Crude oil imports) are one of the main reasons of India’s Current Account Deficit.
( What is Current Account Deficit (CAD)? – Current account is one of the components to maintain balance of payments of a country. It refers to the net revenue of a country from international trade minus the imports in the fiscal year. In the calculation of current account –the goods, services and transfers of a country are taken into account. Basically, this refers to when a country’s government, businesses and individuals import more goods, services and capital than it exports. The difference in the balance is precisely what is called the ‘Current Account Deficit.’ )
Another issue with gold investments in India is that it is mostly an ‘unproductive asset’. The stocks of gold in India are estimated to be over 20,000 tonne (worth over Rs. 60 lakh crore) but mostly this gold is neither traded nor monetized.
Crude oil is an essential commodity, so Govt can’t do much with the oil imports. Whereas Gold is not an essential commodity, hence lot of restrictions to curb the gold demand and also new proposals to monetize it are being planned.
The Union Finance Minister Shri Arun Jaitley has announced several steps for monetizing gold in Budget 2015. These are;
- Gold Deposit Scheme – Govt proposes to introduce ‘Gold Monetisation Scheme’ (Gold Deposit Scheme). This scheme will replace the existing Gold Deposit and Gold Metal Loan Schemes.
- Sovereign Gold Bond – The Finance Minister also announced the development of an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.(You may read my latest article on “Gold BondsScheme : )
- Gold coins with Ashok Chakra – Government will also introduce Indian Gold Coin, which will carry the Ashok Chakra on its face. This may help in reducing the demand for coins minted outside India and also help to recycle the gold available in the country.
Let us now understand : “What is Gold Deposit Scheme?” – “How will the Gold monetization / Gold Deposit scheme announced in Budget 2015 work?” – “What will be the interest rate on Gold Deposit Scheme?” – “What is Sovereign Gold Bond?” – “What will be the redemption amount on these bonds?” – “What is the fixed interest rate on these bonds?” – “How will banks benefit from these schemes?” – “What are the challenges to implement the gold monetization schemes?”…..
Gold Deposit Scheme – Budget 2015 (Gold Monetization Scheme)
Under this Scheme, Gold deposits will be sought from Temples, Charitable Trusts, Individuals and other institutions who have holdings of physical gold.
How does this Scheme work? – You (as an individual) can go to a Bank (like State Bank of India) and deposit your physical gold (I believe, banks may prefer coins/bars to jewelry) in Metal Account (this account may be linked to your Savings a/c). Banks will assess the purity and value of your gold. Banks will then credit your metal account with points (similar to stock units in Demat account). These points represent the value of your physical Gold.
You will get fixed interest rate, this can be somewhere between 2% to 3%, on these deposits. Remember, you are still the owner of these Gold deposits. The duration (term) of these deposits is yet to be announced. It can be from 1 year to 7 years. At the time of redemption, you will get back your gold (may not be in the same form), but with same purity.
So, Gold Deposit Scheme offers interest on regular basis for gold deposited, which otherwise would have been in your bank locker or home.
How does Banks Benefit? – The Banks will lend gold to Jewelers on little higher interest rates. So, banks may earn profits (The interest paid on your metal account – the interest earned from lending). Banks may also securitize these loans and can convert them into Gold Backed securities. These can be sold / listed in domestic (or) international financial markets. So, all the stakeholders (Banks / Jewelers / Individuals) would be able to monetize gold.
What are the challenges to implement Gold Deposit Scheme?
- Banks may have to use the services of purity verification centers. They lack expertise to assess the purity of gold.
- Transportation and storage of Gold can pose a big challenge to Banks.
- Most of us may not have bills on gold purchases. This may discourage many to monetize the physical gold. Banks may ask you to meet its KYC (Know your Customer) requirements while opening Metal accounts.
- If the period of deposits (Term / duration) is longer, investors may hesitate to invest in this scheme. Minimum deposit can be for a year with multiples of one year extensions to provide flexibility to depositor.
- The minimum acceptable quantity is also a very important factor. (The existing Gold Deposit schemes accept deposits of over and above 500gms only)
- The emotional bonding associated with gold investments can also be a hindrance.
Sovereign Gold Bond – Budget 2015
You can invest in Gold Deposit Scheme if you already possess physical gold. But, If you are planning to buy or invest in Gold, Govt wants to provide an alternate to buying physical gold i.e., Gold Bonds.
How does Gold Bonds work? – You (investor) can visit a Bank and buy these Gold bonds at the prevailing price of gold. These bonds will carry fixed rate of interest (like Bank FD). The rate of interest can be in the range of 1% to 2%. At the time of redemption (maturity), you will get back the amounts equivalent to the gold price on the day of redemption. So, the value of bonds are dependent on the gold price movements.
(The beauty of this instrument is that when the price of gold goes up the value of the bond price also goes up by the same amount)
In this scenario, neither bank nor you are buying physical gold. (You will get gold returns but there’s no need to buy or import gold. These returns can be negative or positive.)
Investors who want to invest in Bars / coins for investment purpose can consider investing in the bonds.
Sovereign Gold Bonds could be a better alternative than gold ETFs (Exchange Traded Funds), where fund houses deduct permissible expenses on ETFs.
There is a proposal to allow the banks to use these gold deposits or bonds to meet their statutory requirements ().
What are the challenges?
- Most of us prefer buying physical gold to paper gold. It would be very challenging to make individuals switch from buying physical gold to a paper which promises gold like returns.
- The duration of bonds can be a very important factor.
- How capital gains on these bonds are treated, is also a very important factor. (From Taxation point of view)
- If gold prices rise steeply, banks may get affected, the repayment burden increases. So, they may have to cover this risk either by hedging or by taking insurance cover.
- Banks may have to provide ‘Pre-mature’ redemption facility.
(You may read my latest article on “Gold BondsScheme : )
Latest Updates on Govt’s Gold Monetisation Scheme ; (Updated on 20-May-2015)
The Finance Ministry has issued a Draft Gold Monetisation Scheme on 19th May, 2015. The draft rules are open for public comments & feedback till 2nd June 2015. The key highlights are as below;
Benefits to Customers or Gold Depositor :
- As per the draft proposal, the Govt is likely to exempt the scheme from Wealth tax, Capital Gains Tax and Income Tax.
- A customer can get purity certificate from Hallmarking Centres that are Bureau of Indian Standards (BIS) certified at a nominal fee. The minimum quantity that can be deposited is 30 gms (jewellery as well as gold coins etc.,).
- The testing centers will let the depositor know the estimated value of pure gold. If the depositor accepts the estimated value, the testing centres will melt the gold. The depositor will get the Certificate for the value of the deposited gold. (The depositor can take the gems or stones that are present in the jewelery, if any)
- This certificate can be presented to a bank, who in turn will open a “Gold Savings Account” (Metal Account / Egold Account) and credit this account with the quantity of the gold deposited at the purity testing centre.
- The rate of interest payable on the metal deposited will be credited into the account after 30/60 days of opening of account. The interest amount is payable in the form of Gold units.
- The minimum tenure of the deposit can be 1 year
- The depositor on redemption date can either take cash or pure gold.
Benefits to Banks :
- Banks can have another stream of income through Gold Monetisation deposit scheme.
- Banks have the freedom to set their own interest rates on the gold deposits.
- Banks can also use the deposited gold to make coins and sell them to the public.
- Banks can lend the gold deposits to Jewelers at higher rates and earn margin (income).
- There is also a proposal to allow the banks to use the deposits to meet statutory requirements like .
Latest update (08-June-2018) :
A depositor can now make Short Term deposits (1 to 3 years), Medium Term (5-7 years) and Long term Deposits (12-15 years). The rates of interest on Gold deposits is 2.25% pa on medium term deposit & 2.5% on long term deposits.
The current government has pinned lots of hopes on new Gold Monetisation Schemes. People will have to be encouraged to invest in these schemes. These gold monetization schemes may have to offer a higher interest rates.
(During the Great Depression, US needed more gold to print more dollars; US citizens supported their government by giving up personal gold items. But, here in India, when Morarji Desai tried to implement the Gold Control Act, he got no support from the citizens.)
We need to wait and see if both these schemes will actually free-up gold imports?? Kindly share your views and comments to make this article more useful.
(Image courtesy of Master isolated images at FreeDigitalPhotos.net)
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