2015-04-06

Gold Developments in India

Are more or less likely to hold gold if you are paid interest on your gold holdings?
Gold monetisation scheme and sovereign gold bonds may be launched in May
In an attempt to utilise the idle gold in the economy, the government is likely to launch the gold monetisation scheme and sovereign gold bonds by May, reported ET Now.

Finance Minister Arun Jaitley had announced the government's intent to introduce these schemes during his Budget speech on February 28. According to ET Now, the government is likely to offer a nominal rate of interest as a part of the gold monetisation scheme.


"The government is ironing out various pricing and infra availability issues. It is also figuring out the kind of rate of interest that can be given on the gold monetisation scheme," ET Now said.

In a move that may make the scheme lucrative, the government plans to add unused or broken jewellery as a part of the gold monetisation scheme. "This will help monetise unused gold that is currently lying at homes," ET Now said.

Gold savings scheme could erode India's gold demand
As per the proposed gold monetization scheme, customers could deposit their idle gold under the safe custody of bank. The deposited gold will earn interest too. Previously introduced gold monetization schemes had been failures on account of lower interest rates. However, the proposed scheme will pay higher interests in order to achieve maximum monetization of the household gold. The banks in turn will be allowed to lend this gold to jewelers. This will cut down the country’s gold import bill. The customers, upon the end of deposit period, will be paid equivalent gold in the form of bars.

The gold sovereign bond scheme allows customers to purchase gold bonds instead of physical gold. Upon completion of the bond term, the bond can be redeemed at the market value of gold on the date of maturity.
Monetization could curb gold imports because increased velocity causes the total money supply to increase, reducing the price. However, this assumes that in India, this doesn't make gold even more attractive. Gold is great sitting in your drawer, but you have savings in interest bearing accounts. If gold pays interest, why not pull your gold out of your drawer and your savings out of the bank?

Can Modi unlock $1 trillion worth of gold stashed away in India’s lockers?
Just 10% of this bullion, estimates the State Bank of India, could raise over Rs1 lakh crore in gold deposits over the next three years. And because Indian banks are required to maintain about a fifth of their deposits in gold or cash reserves, more gold in their vaults could free up money to lend for housing or business.

“This is a very good scheme,” said Samraj Jain, whose family runs the M. Shermal Jain Jewellers chain in Hyderabad. “Instead of their gold lying dead, people can give it to the bank and earn some money.”

“The banks can then lend it to jewelers at a higher interest rate,” he explained. “The depositor is happy because his gold is safe, the jeweler is happy because he doesn’t have to import so much gold, and the government is happy because gold is being recycled.”
Unless India's government or financial system plan this as a scheme for replacing physical gold with paper gold, it will fail to reduce demand because gold is more attractive when it has fully rediscovered its monetary value.

The plan is a great idea because India has a lot of capital lying dormant. Putting capital to work is always a good idea and it will benefit everyone. Whether it actually curbs demand in the long-run, however, is an open question. Unless Indians give up their affinity for physical metal, making it more profitable to own gold will increase the long-term physical demand.

Indian jewellery billionaire Rajesh Mehta to buy Australian gold assets
India's biggest jewellery maker, billionaire Rajesh Mehta, wants to deepen his relationship with Australia's gold industry by buying stakes in Australian mines and potentially opening retail jewellery stores in the country.

Speaking on a rare visit to Melbourne, Mr Mehta said his company wanted to spend up to $US700 million ($921 million) growing its presence in Australia, with mines the primary focus.

'We have been importing gold from Australia on and off in the past, but now we want to have a formal presence in Australia," he told Fairfax Media.

"We are setting up a subsidiary in Melbourne primarily to look into acquiring interests into the gold sector of Australia, looking at gold mining assets in terms of equity or loan or whatever is feasible for us so we can ensure a reliable and permanent gold supply-line to our company.
I read articles like this and wonder, why don't the gold miners see the future and open their own banks? One day in the future, the banks are going to take the mine supply and earn a lot of money off of it. Why not go vertical and cut out the middle man?

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