Another admission that Indian gold ETFs would loan their metal, suppressing prices


Banks' Gold Plans Fail to Shine

By M. Allirajan
The Times of India, Mumbai
Saturday, December 29, 2012

Even as the government is considering schemes like gold deposits to rein in the huge surge in gold imports, such initiatives haven't yielded much success in the past. Bank-led schemes to garner gold have not been able to mobilize the holdings of the yellow metal from the public in any significant manner.

SBI, which launched a gold deposit scheme in 1999, withdrew it as it was not successful. Though SBI re-launched the scheme in 2009, gold was mobilized largely from temples, trusts, and wealthy individuals.

Bank-led schemes collected only 36.1 tonnes of gold till 1996, a mere 0.4% of the gold stocks that were available at that time. The country has 18,000 tonnes in gold stock now.

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Since the minimum gold accepted under such schemes was usually in excess of 200 grams and the metal was locked in for a period of at least three years, it didn't gain much traction. Moreover, gold deposit schemes involved conversion of gold mobilized from the public into gold bars for lending to jewellers.

"Most people save their gold as jewellery. Since these schemes required melting of gold, there was hardly any response," an analyst tracking gold said. "Indians don't like parting with their gold."

An attempt was made to auction official gold holdings to the public to contain imports. But the move was dropped as it was considered impractical.

"There is so much gold already available with exchange-traded funds. They can be allowed to lend their gold," said Lakshmi Iyer, head of fixed income and products at Kotak Mahindra Mutual Fund.

"Investors would desist from buying physical gold if they are allowed to redeem gold ETFs in the form of coins," a top official with a leading fund house said.

"Gold ETFs can be allowed to lend to big jewellers after putting in place the necessary regulations. It would be a good starting point," Lakshmi said.

Gold ETFs manage assets worth nearly Rs 12,000 crore and this works out to around 40 tonnes of gold at current market prices.

Gold loans have played a positive role in monetizing the yellow metal. Banks and non-banking finance companies are estimated to have offered gold loans to the tune of Rs. 1.21 lakh crore.

The gold mortgaged to avail loans is estimated to be around 621 tonnes in 2012, data compiled by Kotak Institutional Equities showed. This represented 3.4% of the gold stocks in the country.

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