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How India aims to turn gold into paper and suppress its price, as in the West
Switch to Paper Gold to Help India
By Adhil Shetty
Decca Chronicle, Secunderabad, India
Sunday, March 3, 2013
"Current account deficit" is all over the news these days. Be it the general public, investors, foreign institutions, and government agencies, all are aware and talking about the significant deficit that the country is facing.
The other factor that they are talking about is gold imports, a concern shared by the Reserve Bank of India. India is the largest consumer of gold in the world. Its aggregate estimated demand for gold was 1,079 tonnes in 2012, almost 26 per cent of the total world demand.
The working group committee of the RBI has recommended measures to channelise gold possessions. The central bank is working on steps to channelise idle gold held by households both in rural and urban areas. Some of the measures, which investors will see getting implemented in coming days, are detailed below.
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-- Gold ETFs assets for productive use
The simplicity of gold exchange-traded funds, availability of smaller units, and safety from theft, are bringing a whole new level of investment demand in the country.
Investors are aware of the benefits of gold ETFs and purchase these products to benefit from the intrinsic value of gold. ETFs in India have to maintain 100 per cent of value in gold reserves. The RBI is of the view that the gold reserves should come down so that gold can be used in a more productive way.
The RBI working committee has suggested that a particular portion of gold reserves should be provided to bulk importers as a loan. This transaction can be settled by purchasing the gold at the end of loan tenure. This will benefit considerably as the gold imports will be delayed and the pressure on balance of payments will come down. Banks also have the option to issue gold certificates to ETF for their holdings with banks.
-- Gold savings fund or fund of funds
Also known as the "fund of funds" scheme, this has low penetration in the markets as of now and was launched only in February 2011.
The idea of the gold savings fund is to provide investment returns by contributing to ETFs. The target segment in this case is the retail investor. The investor has three options through which the investments will be dealt with.
He can opt for the growth fund in the first instance. In this, the gains or losses in investments can be checked regularly through the NAV.
The second option is the dividend payout, where the investor will get a return on his investment. In the third option, reinvestment is done on the declared dividend. These funds are open-ended and investors are free from the liability of opening a demat account.
Some of the products that can be launched in the coming future in the markets are below:
-- Modified gold deposit scheme: Under this scheme, customers will deposit their gold with banks for a maturity period that can range from three to five years. The gold can be in the form of jewellery, coins, and bars without any restrictions on the weight. This gold will be melted and refined to make standard bars. The lock-in period is proposed at one year. The customers will be given returns on the total quantity of gold they have deposited. The gold will be used for infrastructure financing and other high-return investment options. It will be settled in cash, gold bars and coins.
-- Accumulation plan for gold: The sale of bars and coins by banks requires purchasing gold stocks for the purpose of immediate deliveries and future deliveries. In the accumulation plan, the physical delivery will be done at a later date, and this will help banks reduce their buying obligations. A part of the modified gold will be leased and provided as a loan to jewellers. Only the portion that requires immediate delivery will be kept in possession by the banks. The funds mobilised by this can be invested in other financial instruments. The issues at this juncture in this scheme are that it requires regulatory approvals by the banks and a proper hedging mechanism.
-- Gold certificates: The idea is to issue gold certificates with a maturity period of one to five years. The lock-in period will range from six months to one year. Financial institutions will be given the power to decide on the rate of interest. The funds will be deployed by the banks for their loan books or domestic sales to jewellers. The certificates can be assigned collateral security in case of rupee loans. Safety and hedging are the key issues in such gold certificates along with the regulatory approvals by the commercial banks.
-- Paper gold: Paper gold means gold held in paper. The quantity of physical gold will be mentioned in the paper. This will have the option of converting into physical gold at a short notice. The instrument will be kept in the gold savings account with the bank. This will operate similar to the savings bank account. The investor will have the option to buy gold at the displayed price and will get the account credited with the amount, which is equivalent to physical gold. The depositor will not have the option of selling gold to the bank. However, before taking delivery of the physical gold, the customer can encash his gold.
-- Other products: Apart from these products, the Reserve Bank of India is also planning to introduce gold-backed pension products, gold-linked accounts, and e-gold through banking channels. Currently, the e-gold facility is provided by the National Spot Exchange Ltd. in which banks can be the intermediary between the exchange and the investors. The existing accounts will be linked through which customers will be able to place an order to NSEL, and that will get recorded by the bank. Redemption will also be done through the banks.
Though these schemes need to be filtered after checking the exiting norms, the RBI is of the view that modifying existing schemes and new products will bring the idle gold for more comprehensive use in the financial markets.
Adhil Shetty is CEO of BankBazaar.com.
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