Gold monetisation not viable for investors in the yellow metal
Mumbai-India (Jun 21) Gold monetisation is not new to India. In the past we have had schemes like the 6.5 per cent Gold Bonds, 1977; 7 per cent Gold bonds, 1980; National Defence Gold Bonds and Gold Deposit Bonds, 1999. These schemes never met the extent of predicted success or mobilisation. For instance, it is estimated that the Gold Deposit Scheme of 1999 collected a meagre 15 tonnes of gold.
These schemes had some common features: interest exempt from tax, no wealth tax, no octroi or sales tax on transfer of bonds and no capital gains on transfer. But the schemes failed chiefly because of a low rate of interest of 0.75-1 per cent, lack of an amnesty scheme for undisclosed gold and a minimum threshold of 500 gms of gold per investment lot.
While most of the concerns still continue under the proposed draft of the monetisation scheme, the minimum threshold for investment is proposed to be reduced to 30 gms from the prevailing 500 gms.
In simple terms, gold monetisation refers to surrendering gold jewellery, coins, bars, etc to designated banks in return for bonds/deposit certificates. For example, if you surrender 100 gms of gold coins you will receive a bond or a deposit certificate for 100 gms. You will also receive interest in grams of gold for the duration of the deposit/bond. The gold jewellery to be deposited will be melted at designated agencies and converted to equivalent 24 carat gold. Your deposit certificate shall be issued for the 24-carat gold. The rate of interest is to be decided by the banks.
Does the scheme benefit individuals? It all depends on the nature of holding and purpose. For persons holding bullion as an investment for their daughter's wedding or as a natural hedge or as part of portfolio diversification, the scheme is a boon. You are relieved of the burden of safeguarding gold and can save on locker rent charges. There's also the advantage of earning tax-free returns. Even if the rate of return is as low as 2-3 per cent per annum it is still better than bearing costs for holding gold. The same situation applies to someone holding ancestral jewellery, which would invariably be exchanged for new models at the time of consumption. Here, too, the scheme is attractive as you can monetise the jewellery upfront and redeem it for gold at the time of consumption.
If the individual holds gold jewellery for both consumption and investment, the scheme may not be a viable option since the cost of making charges and wastage need to be foregone at the time of monetisation. Further, subsequent reconversion into jewellery at the time of redemption would entail another 15-20 per cent of wastage and making charges, making it extremely inefficient. Although this section of the population forms a significant chunk of gold buyers, the former category of individuals also possess huge quantities of gold deposits/reserves which, if tapped into the scheme, could make a significant impact in achieving the intended objective. However, for the real success of the scheme, the government should not insist on knowing the source of income for acquiring the gold and also assure investors that no action will be initiated against them under the Income Tax Act or any other legislation.
Has gold monetisation succeeded in other countries? Let's try and understand the impact of a similar scheme in Turkey, its outcome and learnings for India.
The Turkish model
The Turkish model is a classic case of a comprehensive and integrated approach to monetise domestic gold as well as an attempt to strengthen the entire supply chain mechanism to make the initiative a sustainable success. With close coordination with the central bank and the gold industry, the Turkish government improved market infrastructure and encouraged banks to develop suitable gold investment products. Some of the key features of the scheme are as follows:
Creation of supply chain infrastructure: Since its creation in 2002, the Istanbul Gold Refinery has three world-class London Bullion Market Association (LBMA) certified refineries that produce gold bars and coins.
Setting up of accredited assaying units: Turkey has established accredited assaying units where non-standardised gold are converted to appropriate tradeable assay certificates which are considered as valuable as the underlying gold.
Branded coins and standardised pricing: The Turkish government launched its own branded coin which can be purchased by the retail investors. This is the only form of gold coin sold at authorised outlets.
Gold permitted as reserve assets: The Central Bank of Turkey permitted commercial banks to consider gold (owned as well as deposited) as a reserve asset.
Launch of gold deposit accounts: This is similar to a savings account where nationals can deposit gold, receive coins/bullion in return and earn interest in gold.
Introduction of gold-based investment products: To propel the gold market, several gold-based investment products such as Gold Demat Account, Gold Time Account, Gold- based mutual fund and Gold Pension Fund were launched. Gold collateral loans, credit cards and credit for customers backed by gold deposit were launched by commercial banks.
Outcome and learnings
• Over the past two years, Turkey has successfully monetised around 300 tonnes of gold. India, too, should develop an effective gold infrastructure with a focus on gold refineries and gold accreditation centres
• Turkiye Is Bankasi AS (ISCTR), Turkey's largest bank, has increased its gold deposits 10-fold in the last two years. Back home, there is a need to encourage and incentivise banks and financial institutions to create and aggressively promote gold-based products
• Turkey's domestic gold production rose from 1.4 tonnes to 33.5 tonnes between 2001 and 2013. The launch of innovative gold products has reduced dependence on imports and helped in narrowing Turkey's current account deficit.