India has had the distinction of being the second largest consumer of gold. Late Arun Jaitley the then Finance Minister stated that Indian households (and temples) collectively own 20,000 tonnes of gold, a figure that is equivalent to the combined amount of gold held by the central banks of the US, Euro area and China.
But the asset is typically strewn across household both in the urban and rural areas often in bank lockers thus earning negative interest due if one considers locker charges or in dingy lofts away from the gaze of dacoits and burglars. In either case, they have remained the most unproductive asset but with the distinct potential for capital appreciation.
A vastly more attractive Gold Monetization Scheme (GMS) was thus launched in 2015 to not only entice households and temples into making an idle (non-income producing asset) into an income-producing asset as well as to staunch the foreign exchange outgo on import of the yellow metal.
The refurbished GMS offered interest ranging from 2.25 percent to 2.50 percent per annum as against the niggardly 1 percent earlier. Apart from temples like Mata Vaishnav Devi Trust, TTD and Shirdi Sai Baba Trust, the scheme has always been shunned by housewives as well as by investors in gold.
The heightened interest thus couldn’t stop the scheme from becoming a damp squib. Housewives hate to see their jewels morphed into pure gold i.e., by melting despite the offer of interest on such pure gold deposits and investors in gold fear midnight knock by the taxman if they embraced the scheme especially with heavy deposits. Temples being religious trusts whose incomes are in any case exempt from tax never feared the taxman.
The Securities and Exchange Board of India’s (SEBI) has rolled out a new framework for investors to swap their physical gold into exchange-tradeable Electronic Gold Receipts (EGRs) to revive flagging interest in monetizing gold. When gold is surrendered in favour of EGRs the potential to earn capital gains is infinitely more than the pitifully low interest under GMS. In that sense EGRs definitely scores over GMS. But housewives’ apathy is bound to continue unless EGRs is marketed well.
Perhaps the first-year experience should be the best advertisement should it yield at least 10 percent annual return. That perhaps should make housewives sit up and think. But then all housewives don’t think alike. Some of them indeed need jewels to bedeck themselves with especially in social and family gatherings if only to flaunt their wealth and enhance their beauty.
So, time will tell if EGRs have succeeded in overcoming housewives’ resistance to monetization of gold. Be that as it may. Temples however are likely to stick to deposits as they are happy to earn modest but assured returns for their otherwise unproductive assets most of them offered by devotees.
EGRs score over GMS in another vital respect--- price discovery. As it is, gold prices are discovered by banks and exchanges in London and Zurich. Strangely, both Britain and Switzerland are not gold production centres.
South Africa and Russia have been. Fresh gold discovery over the years has in any case come to zilch practically but thanks to their preeminent status as world financial centres, London and Zurich call the shots on the basis of their futures and options market for currencies as well as gold. So much so the Indian Bullion Association fixes daily gold prices faithfully following the prices discovered in the Europe. EGRs can reverse this trend, and India can discover its own price unrelated to European centres as well as to the exchange rate of INR vis-à-vis the US dollar.
These are early days. SEBI has wisely allowed EGRs to piggyback on existing stock market infrastructure. Investors have been allowed to use their stock demat and depository accounts to transact in EGRs.
Depositories and clearing corporations handling shares have been tasked with facilitating EGR trades. To handle the physical gold dealings inherent to EGRs, SEBI has mooted a new class of intermediaries -- vault managers -- who will register with it and take on the onus of exchanging, verifying, storing and safekeeping the deposited gold. The success of EGRs thus hinges on the willingness of gold market intermediaries to empanel as vault managers. But the Rs 50 crore minimum net worth and onerous KYC and record-keeping obligations may prove a deterrent. Only a couple of vault managers have so far registered with SEBI. All in all, a good initiative by SEBI.
Read his other columns here.
