Gold bond schemes to encourage gold investment in India

The gold bond scheme recently finalized by the Government will attract more and more gold investment demand in India. At present, an estimated 300 tons of physical bars and coins are purchased as investments. Under the new scheme, investors can park money in papers, which will be backed by gold.

The gold bond scheme permits buying bonds worth 500 grams of gold per year. RBI will issue bonds on behalf of government. Someone who invests in gold bars and bullions purely for investment purpose wouldn’t mind buying those papers. They can also take loans against these papers and trade these papers.

Government will be launching two gold schemes – monetization and sovereign bond in November to rein in the demand for physical gold and contain its import. According to a report in first, Government will find it difficult to pull of the gold monetization scheme unless the banks and the Government decide to offer attractive returns. Under the moentisation scheme, the customer gets his gold ornaments melted and purity assessed from one of the recognised centres. This gold is later passed to banks against which a certificate is issued. On maturity, the customer can redeem the gold value with a small interest.

Through this schemes the Government targets to bring an estimated of 20,000 tons of gold lying in Indian households and temples in the domestic market and thus curb imports. But, given the mindset of consumers, not many people would want to see her long-preserved, family-inherited, emotionally attached, piece of yellow metal lose its identity and ‘feel’ by melting it, for meager returns. As per the guidelines, the interest rate on shorter-tenure gold deposits will be left to the banks, on the basis of prevailing international lease rates and other costs, while for the medium to long term, the rate of interest will be decided by the government in consultation with the RBI.

According to a World Gold Council study, more than half of the gold imported in India is used for wedding purposes (not investment) and a significant chunk to make ornaments. Indians do not easily part with her gold ornaments given to her by parents, unless there is a pressing need. While rolling gold monetization scheme, there are many hurdles that Government may face which includes dealing with temple trusts and major challenge will be checking the inflow of black money through this channel. There is no clarity on this part in the guidelines.

Unlike other assets such as real estate, it is highly difficult to verify the ownership of gold, especially if the gold is old. Those, who have unaccounted wealth stored in the form of gold ornaments and bars, will find this as a golden opportunity to legitimise their ill-gotten wealth. They can split the gold into small instalments and approach banks either by themselves or a benami.

Sovereign gold bonds, on the other hand, are aimed at people buying the precious metal as an investment. Such bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for 5—7 years with a rate of interest to be calculated on the value of the metal at the time of investment. However, there will be a cap of 500 grams that a person can purchase in a year. Such bonds will be offered to only Indian citizens and institution while the securities will be traded on exchanges to allow early exit for investors. The government expects to raise `15,000 crore through the gold bonds in the current fiscal.