Gold Monetisation Scheme: Good beginning, more work needed

The Gold monetisation scheme, as spelled in the draft guidelines at least, seems to be a good start but more work is required if it needs to succeed. The scheme does offer certain very good incentives but other finer aspects need to be carefully thought-out to impress gold holders to make some contribution. There have been several gold monetisation schemes launched over years but none seem to have been close to the desired objective. The success of the scheme would depend on various factors - most importantly, the interest rates offered.

Below listed are the hits and misses of recently revealed draft fine print of the gold monetisation scheme.

The Hits

Tax exemptions – The intention to exempt deposits / income from Capital Gains Tax, Wealth tax and Income Tax is a good incentive to lure gold hoarders to part away with some of their gold holdings.

Low minimum Quantity – Minimum Quantity set at 30 grams is much better than the 500 grams offered earlier. Still, it could have been further lowered to say about 10 grams to lure people to try the scheme initially with much lower denominations and gradually increase the minimum quantity over years as people become more comfortable with the process.

Mobilized gold as part of CRR/ SLR – It`s a good way to incentivize banks but banks should be willing to pass on some benefit of this to the gold depositor. This will atleast add to the ability of banks to offer higher rates.

Banks can sell gold for foreign currency – banks selling gold for foreign currencyin a way, provides them an opportunity to export gold which though a prerequisite for the development of the gold market is not allowed as yet. However, this brings along the challenge of price risk management.

The Misses

Banks to set interest rates – Banks can currently lease gold from overseas at 1% or at times even lower as such are the lease rates prevailing in the global gold markets. If they can get gold to lease at such lower rates there’s little incentive for them to offer higher rates. Yes, the government has incentivized banks by way of making the moblised gold as part CRR/ SLR but it would depend on the bank as to how much of the benefit it will pass to the depositor. We have witnessed the transmission of interest rate cuts by banks; hope same is not repeated with gold deposits. Something like 5-6% interest rates are likely required to entice investors.

Options for the redemption mode i.e. in gold or cash at the beginning – The depositor should have the flexibility to decide on maturity depending on his needs at that point of time.

Banks can sell the gold – brings in a factor of price risk.

Cumbersome process from a layman’s perspective – The detailed process mentioned in the draft guideline of purity test sounds cumbersome from a layman’s perspective. Also, there various conflict issues that may crop up like melting loss, stone removal charges, etc

Need to introduce buyback facility at any point of time of gold that is given on maturity – to build in the trust factor

Lack of Refineries infrastructure - There are 32 identified refineries and only some of these are NABL certified. There has to be a certification / accreditation of empanelled refineries in line with the LBMA certification. We only have one refinery in India which is LBMA accredited.

Need to enable cash subscription – The gold metal account should also have the facility to except cash deposits and equivalent gold to be credited to the depositors account based on the prevailing gold rate.

A gold bank / corporation dedicated towards this task should have been setup to ensure smooth implementation / functioning of the gold monetization program which was missing in the announcements.

Clearly, the government is taking steps in the right direction. There are challenges abound and infrastructure bottlenecks that really slows down the process. However, a more carefully crafted, objective oriented approach keeping in mind the practicalities of complexities involved will help in bringing out a much more robust policy.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – https://www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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