Precious Metal – GOLD
Last few days there is fall in gold prices and this post is not related to that, while studying the reason behind the fall I grabbed few things so thought of sharing that here.
Gold reserve in Indian households alone is 22,000 tonnes which is equal to $1.16 trillion (almost 5 lakh crores of INR). Just imagine half of this money is circulating in the form of government bonds or some other investment schemes which is running by Indian government then no need for Indian government to borrow money from World Bank. Every year we are running our country with deficit money just look at the below tabular column with revenue and expense details of India which is published by IMF. Projection for next five years looks with deficit amount and it looks government has to either borrow money from IMF or some other country or has to release bonds to get money.
Link for the above data is below
Major of our CAD (Current account deficit) is happening because of the oil import and the next biggest is gold. Oil import is essential because it is much needed for everyday life but gold we are just buying either as a savings purpose or sentimental purpose or ornamental purpose. Gold export industries contributes significant value to our economy, almost 2.5 million (25 lakhs) people are employed and also Indian designed gold jewels/gems export contributes significant value to Indian economy. Although the gold export plays a significant role its very minimal when compared to the gold import ratio. Government also should adapt different market strategy to increase Indian jewelry export so that we can increase our export ratio. Currently gold export is one of the growing export industries in India and for the bright future government should encourage those industry people.
Why more gold demand in world?
Gold has long captured humankind’s imagination. It is malleable, ductile and corrosion resistant and it has many uses from jewellery to technologies (phones, spacecraft etc.)
1. Many people believe jewellery has sentimental value hence they will keep on buying in addition to their usage. Few gold ornaments will be believed as inter-generation asset hence it will be associated with family for longer time.
2. Some people believe gold is religious especially in Indian temples to show their love to god they will give gold ornaments to temple. .
3. Central bank view gold as reserve asset hence they will buy more gold instead of sell.
Why Indians got more attached with Gold?
Demand for gold in India is always there for many years because it is tied with our culture and finance protection. In India lower middle class people always consider gold as their safest investment because they can easily sell the product and convert into cash easily. Every street you can see pawn brokers so it is easy convertible asset for lower middle class and also those people have zero knowledge on other investment products so you can’t blame them saying don’t buy gold it is the critical contribution to CAD. Capital protection for gold is always there, so in India where there are huge number of middle class people buying gold becomes very important. Government has to find different way to rotate the surplus gold which is present in Indian households so that they can reduce the gold imports and educate the people to use other investment products. As per the latest survey which is published by FICCI, 75% of the Indians used gold for safest investment and the rest only use gold for ornament purpose.
Important things government must do for making our future generation to live happily and debt free
- Reduce the imports of gold by rotating the gold which is present in Indian households by proposing scheme with gold deposits.
- Propose new investment schemes with gold so that people can use such scheme for investment instead of buying gold.
- Build recycle technologies to recycle the gold from electronic waste especially used sim cards, phones, old laptops, computers etc.
- Make marketing of Indian jewellery/gems like Swiss watches. Create a brand tag by showcasing our gold designs and our preparation styles by conducting World level symposium and give tax benefits for those people who involved.
Currently government is planned to release government sovereign gold bonds which is nothing but paper certificates of gold. Earlier in 1999 also government introduced gold based scheme but it is not well received by public. We can discuss on both the schemes later.
Recycling of gold:
Recycling of gold happens in two ways either from human (selling) or recycling from electronic waste. Recycling from human either by selling the gold because of financial crunch or investors to make profit because of the increase in price. However recycling of gold varies from region to region and for example during 2009-2013 crisis lot of banks/institutions/investors sold gold that increases gold recycling in western countries which accounts almost 43% of the gold they hold. Fortunately India/China is not affected hence recycling rate is low hence I am not saying we should get affect by recession. By checking the data it looks whenever there is unemployment there is rise in recycle of gold. If we buy the gold at this rate then soon India will be in big debt and all the prices will rise very faster than now. Like the quote “Rich is getting richer and poor is getting poorer.” We Indians have to find alternate investments which should be benefited for both government and the citizens.
Gold deposit scheme 1999 and few amendments in 2009/2013:
The primary reason for this scheme is to bring the idle gold in the country to reduce the gold imports and to provide opportunity for gold holders to earn interest on the idle asset which they hold in hand. For example in India temples or trust organization hold gold coins or gold bars for their future needs and if this gold is recycled it will reduce considerable import % of gold and in turn help to bring the economy upside.
Under this scheme, the owner of gold can deposit his gold, which may be in any physical form, with a designated bank in exchange for an interest bearing deposit certificate of certain tenure. The tenure earlier was between 3 to 7 years but in the recent guidelines of RBI, the tenure was changed to 6 months to 7 years to provide better liquidity to the investors. Any individual, whether singly or jointly or on behalf of a minor can make an application under this scheme. Mutual funds are also allowed to invest in this scheme, as per the recent guidelines. The minimum quantity of gold required to be tendered to apply for this scheme is 500 grams. However there is no upper limit up to which you can avail the benefits of this scheme. It is important to note that under this scheme, your gold will lose its original form and will be melted, tested and then minted into coins/bars. It will indicate the weight of pure gold in the gold deposited (999 fineness). A certificate will be issued once this process is completed; however a provisional receipt is issued by the bank immediately upon receiving the deposit. Interest to be paid is fixed by the concerned bank. For example, State Bank of India in the past had fixed interest rates for 3 years to be 0.75%, whereas for 4 years and 5 year tenures, it was 1%. Again, these percentages do not apply on the monetary value of gold deposited but as a percentage of the weight of gold deposited. For example, 1% of 500 grams would be 5 grams. This gold currency interest will be converted to rupees at a certain specific rate on the date of maturity or payout. Effectively you get interest amount calculated in gold terms.
After expiry of the tenure opted by you, there are 3 options viz.
- Renew the certificates.
- Receive the maturity amount in monetary terms at the prevalent rate of gold.
- Receive the gold back. Please note that when you exercise this option to receive the gold in physical form, you will be given gold bars and it would not be in the form in which you had surrendered.
There are certain benefits of the gold scheme such as – You can earn interest on idle physical gold lying in your lockers. While you benefit from the appreciation in the price of gold in both the cases, in case of GDS you also additionally earn interest on the gold. There is no wealth tax or income tax payable on either the gold or the income from it in case of GDS. In addition to the exemption for interest earned and wealth tax under this scheme, the deposit certificates are not treated as capital assets for the purpose of capital gains tax. Physical gold lying with you otherwise will attract wealth tax and capital gains tax on sale. There is no hassle of storage of gold and concern about its safety. There is no upper limit on how much gold can be deposited under the scheme. The minimum limit however is 500 grams. You can also avail loans against security of the certificates of gold deposit in Indian Rupees from any bank.
Few Demerits as well
1. Investors will lose the original jewellery design since the gold deposited is melted and converted to coins or bars. For a lot of people, this may be the biggest deterrent for investing in the scheme.
2. Investors may need to spend a lot on the making charges if you wish to convert the gold back into jewellery form
Refer the enclosed link for more details on this scheme
Alternate gold based investment scheme for investors
The Finance Minister in his budget speech for the Union Budget 2015-16 made the following announcement:
“India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, most of this gold is neither traded, nor monetized. I propose to… develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond
Refer the enclosed link for details
The main idea is to reduce the demand for physical gold. I feel this is one of the bold decisions which government has undertaken for controlling gold based investments. Instead of buying the physical form, government will issue gold based bond to investors with worth of 2 gram, 5 gram, etc. and in return on maturity there won’t be any physical delivery of gold but there will be cash delivery based on the prevailing market rate. The price of the bond would be linked to the price of gold and it would pay an interest as well to investors. Maturity of this bond is to 5-7 years and this is still in draft mode only.
There are few drawbacks as well because gold market is volatile and in India if you have gold in physical form you can easily get loan in banks/pawn brokers but this one is hard. People need to be educated as well to understand the scheme. If prices falls at least in physical form you own the gold and later you can sell but in this case on maturity investors will be more tricky state.
Whatever the case, buying gold will make our future generation with heavy burden because taxes will go high and then price of all the commodities will go high as well. To save the future generation and to reduce the debt of our country we should think of other alternate investments else we end up in paying huge taxes to government. Already in our country all the prices are going high and we keep on complaining without taking necessary steps then it will lead serious issue then a day will come soon there won’t be any meaning for the money we have in hand.