Government in its effort to keep the gold demand in check has announced couple of schemes
i.e.1). Sovereign Gold Bonds & 2). Gold Monetisation scheme
Here are the highlights:
RBI to issue gold bonds on behalf of the government
The government will declare interest on the bonds from time to time
Maximum limit of 500 gm per person per year in gold bonds
People can buy gold bonds instead of physical gold via gold bond scheme
Gold bond could be for minimum of 5 to 7 years
Gold bonds will pay interest and its price will also be linked to gold
Gold bonds will be done by banks, NBFCs and other authorized entities
Cabinet has also approved gold monetisation scheme
Anyone who has gold as idle asset can deposit them
Deposited gold to earn interest
India imports about 1000 tonnes of gold and these schemes will help to reduce imports
Gold Monetisation Scheme.
Historically investment in gold is always popular because of its easy to buy & sell, easy liquidibility, status symbol, easy to transfer from one generation to another with out any legal process i.e. gift deed or any thing & more importantly easy way to convert black money through its investment in gold.
There is an estimate of country’s house hold stock of gold is approximately 20,000 tones worth Rs:-60 lacks cores, 2 ½ times more than US Fed’s gold reserves of 8000 tones.
Successive govts through different schemes have tried to bring that stock in circulation. This govt too has tried to address the issue through new scheme i.e. Gold Monetisation Scheme with more practical terms & conditions.
Working of the Scheme.
A person shall take a gold in any physical form i.e. coin, jewelry, bar to the specified agency or banks. Bank or agency will check the purity of the gold, open a depository’s metal account there end & the same quantity of gold will be transferred to this account while gold deposit certificate would be issued to the depositors. Interest on this account will start from the date of deposition similar with the bank’s fixed deposits. Depositors will have to comply with the KYC norms.
As the metal account is created by depositor’s gold as a principal, interest too will be paid in gold like 102 or 103 grams for 100 grams of principal.
This will replace both existing schemes i.e. gold metal loan account & another one offered through SBI remained unpopular because of there impractical conditions such as minimum quantity requirement of 500 grams @ 1% interest rate.
While in this scheme the minimum quantity requirement is 30 grams with maximum limit if 500 grams per annum per entity for minimum period of an investment 1 year.
Depositor’s shall have an option to take a gold or cash on completion of there investment period but its choice has to be made in the beginning at the time of opening account i.e. gold deposition.
Interest rate for this scheme would be bit at higher side i.e. @ 3 %.
However from depositors point of view melting of jewelry is inevitable part of this scheme is an emotional issue for many people.
Sovereign Gold Bond
Being a largest buyers at the international gold market Indians gold obsession is well known. It is a second largest import item after oil with approximately 800 to 1000 tones per annum.
As per govt research approx. 350 tones of gold is purchased in the form of coins & bars. Through sovereign gold bonds govt wants to tap these investors investing purely for the investment purpose & as per cabinet note the govt is planning to raise Rs:-15000 cores through these bonds.
These bonds will be issued in 2,5,10 grams of gold for the minimum period of 5 to 7 years. However it will remain tradable with the option of redemption in the stock exchange & investor will get the market value of gold at the time of redemption. But for investors it always better to remain invested for long term i.e. 5 to 7 years which will protect them from the medium term volatility in gold prices.
It is an effort to create an alternate financial asset & an option for purchasing gold in physical form. It is also a better option to gold exchange traded funds. The gold ETF after receiving an investment from the people purchases a gold from the market after deducting expenses up to permissible limits & stacked the purchased gold in bank lockers while in these gold bond actual purchases & deduction of expenses shall not require.
Short term investment may carry a risk of market volatility & price fluctuation compare to long term investment & is a good option like parents wanting to buy jewelry for there daughters.
These bonds will attract the capital gain tax same as it happens in case of sale of actual gold.
Profitability of investment in gold bonds is purely based on the presumption of scarcity, popularity, demand & supply of this precious metal but also carries a risk of price correction because of its inter-linking with many international issues, policies & polities as well.