Like Sisyphus, Gold Mountain Too High To Scale – Analysis

By Sandeep Bamzai*

Morgan Stanley estimates Indian households own, directly or indirectly, around $1.5 trillion in gold, about the same as in bank fixed deposits, and against just $400 billion in shares. The hunger driven by the fact that physical gold is considered the best inflation hedge, acts as a collateral and is completely fungible. As much as 20,000 to 25,000 tonnes of idle or unproductive assets lie with Indian households and temples. The real gold buying boom took place between 2002 and 2011 in India. Best way to describe this continuing magnetism is that gold is an emotional, sentimental and religious purchase in India. Gold as an investment option comes second best in India after real estate. In 1990, gold per 10 gems was Rs 3200, up to Rs 440 in 2000 and since then it has exploded exponentially due to increased household wealth, rapid urbanisation and even higher rural incomes. In 2005, it became Rs 7000 per 10 gems and then vroom Rs 18,500 in 2010. By 2012 it was at stratospheric heights of Rs 31,799. The sheen since the gold boom may be off, but gold prices hover between Rs 26000 to Rs 27,000 in 2015 confirming that as an asset class, India love for gold is not over. All attempts in the past have failed at monetising this dead asset. And my sense is that the new scheme will meet with the same rejection that the earlier schemes have seen primarily due to interest rates not being attractive, lack of proper infrastructure to support melting and certification and most vitally attempts at tax terror which will automatically come with the territory.

The NDA Government has launched a fresh gold monetisation scheme, but skeptics aren’t convinced that this will succeed where others in the past have failed abysmally. Banks are expected to collect gold for up to 15 years to auction them off or lend to jewellers from time to time. They will pay 2.25-2.50 per cent interest a year, higher than previous rates of around 1 percent. But critics argued that many prospective depositors will not bite the bait due to several reasons. For instance the income tax department may question the source of gold leading to harassment, while others may find conventional bank deposit rates of 8 per cent much more attractive. The other scheme is the Gold Sovereign Bond to be issued by the Reserve Bank of India (RBI) on behalf of the government with an interest rate of 2.75%. The bonds will be sold through banks and designated post offices. Again the interest rate is too low to evince interest from depositors.

There is no denying the impetus to mobilise part of the 25,000 tonnes of India’s above ground holding of gold becomes integral to the long-term management of the country’s appetite for gold. A gold deposit scheme launched in 1999 has achieved less than fifteen tonnes over a 15-year period. It was tailored for banks and large gold holdings, overlooking the gold held by India’s teeming millions. Further the only option for banks was to deliver their mobilised gold to the India Government Mint for being refined into gold and the huge time lag resulted in a non-transparent operating environment and inability to assure optimum realisation for their deposit holder. Banks’ core competence is currency and credit, not precious metals. It is appropriate that banks focus on what they are good at – mobilising deposits and handling the risks associated with transforming them into loans. Transparency in assurance, storage and tracking and management of metal deposits being important constituents, are best done by an organisation that has the competence to provide the precious metal part of the transaction on behalf of the banks.

In 1999, banks were permitted to float the gold deposit scheme after approval of RBI, but hardly any banks showed interest since it was cumbersome to run and banks did not feel it was adequately remunerative. SBI had launched the Gold Deposit scheme (GDS) earlier in November, 1999, which again was discontinued. The scheme was re-launched the same in 2009. The scheme was available at only 50 odd branches of the bank. Then in another desperate attempt after a bloating current account deficit rocked the economy, the RBI in February, 2013 relaxed the condition of prior approval of RBI for launching the scheme. But still there were no takers.

Typical of the government, there is the spectre of tax terrorism. Gold bond investors will have to disclose their PAN numbers registered with the income tax department, if the value of gold is worth more than Rs 50,000 rupees which is a bit of a joke given that 10 grams of gold is close to Rs 27,000. Will this allow the government to keep a watch on the gold source? of course it will and perhaps tracking the owners and source of gold may be the real agenda. Others reckon that the likely loss of nearly 20 to 30 per cent of the weight of the jewellery at certified centres at the cost of the depositor will be another deterrent. All in all, gold is a physical commodity that rests in the lockers of Indians and they remain content with the fact that there are no prying eyes yet to track the bulk of their hereditary wealth. Till the scheme is made much more lucrative and perhaps mandatory in some form, it is doubtful that this scheme will perform better than the earlier ones.

*The writer is a Visiting Fellow at Observer Research Foundation, Delhi