Brief Guide to Gold Schemes.

Published On - November 23, 2015

admin Gold Schemes

In order to reduce the ever-growing demand for physical gold, the government of India through Prime Minister Narendra Modi launched the much-awaited gold related schemes to tap the festive season’s requirements. The schemes include ‘India gold coin’ bearing Ashok chakra, gold monetization and sovereign gold schemes. The gold monetization schemes (GMS) aims to tap house hold gold stocks of around 22000 tonnes, the sovereign bond scheme would help shift part of the estimated 300 tonnes of physical gold bars and coins purchased every year in the country for investment into demat gold bonds.
In India, people have been purchasing gold either for consumption i.e. to use in its own right, in form of jewellery, or as capital good in hope of using it in future indirectly funding consumption. Investors hold gold for a variety of reasons like as a store of value, a hedge against inflation and currency fluctuations, and as an insurance against uncertainties and tail risks. This may be a good reason for gold holders in India to give the gold schemes by the government a serious thought.
By launching these schemes, the government seeks to monetize the gold holdings in the country and reduce the country’s significant gold import bill, which is due to the incremental demand for physical gold. It aims to improve the productivity of the currently idle gold held by the public in India for purposes more productive for the economy in the end.
While the rupee has depreciated by 47% against the US dollar over the past five years, gold in rupees terms has appreciated by 28%. Consistent with this, there is a positive correlation between consumer price index (CPI) inflation and gold purchases. The gold monetization schemes are linked to the gold linked to the gold loan schemes, which would allow metal collected under the monetization schemes to be lent out to the jewellery industry.Indeed, gold is a preferred method of savings and investment, next only to deposits in bank accounts. Hence, in the implementation of these schemes, the banking system in India will play a very important role.  In short, the various gold schemes launched by the government are as under:

  1. INDIAN GOLD COINS: 
  2. The coins will be available in denominations of 5 and 10 grams. A 20 gram bar or bullion will also be available.
  3. The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy recycling.
  4. The distribution of these coins will be through designated and recognised MMTC (Metals and Minerals Trading Corporation) outlets.
  1. GOLD MONETISATION SCHEME:

All Resident Indians can make gold deposits under this scheme. The minimum deposit at any one time will be raw gold i.e. in forms of bars, coins, jewellery excluding stones and other metals, etc.equivalent to 30 grams of the precious metal of 995 fineness. There is no maximum limit for deposit under the scheme and the metal will be accepted at the Collection and Purity Testing Centers (CPTC) certified by the Bureau of Indian Standards. Under this scheme:-

  1. Gold Monetisation Scheme can earn up to 50 per cent interest rate on their idle gold.
  2. Interest rate on Medium and Long Term Government Deposit (MLTGD) are 25 per cent and 2.20 per cent, respectively.
  3. The tenor of medium term would be between 5-7 years while long term would for 12-15 years tenure.
  4. The deposit under MLTGD category will be accepted by the designated banks on behalf of the central government.
  5. Interest on deposits under the scheme will start accruing from the date of converting the gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the Collection and Purity Testing Centers (CPTC) or the bank’s designated branch, as the case may be and whichever is earlier.
  6. The principal and interest of the deposit under the scheme will be denominated in gold.
  7. The gold received under MLTGD would be auctioned by the agencies notified by the government and the sale proceeds will be credited to government’s account held with RBI.
  8. Reserve Bank of India will maintain the Gold Deposit Accounts denominated in gold in the name of the designated banks that will in turn hold sub-accounts of individual depositors
  1. SOVEREIGN GOLD BOND

Instead of buying gold in its physical form, investors can place their money in bonds backed by gold. The bonds will be available both in demat and paper form. It will have more or equal advantage against the physical gold. The bond will be issued by RBI on behalf of the Government of India. The bond would be restricted for sale to resident Indian entities and the maximum allowable limit is 500 grams per person per year.
Under this scheme:

  1. The RBI has fixed the public issue price of sovereign gold bonds at Rs 2,684 per gram.
  2. These bonds are issued in denominations of 5, 10, 50 and 100 grams of gold or other denominations.
  3. Only Banks and designated post offices, as may be notified, will sell the Bonds to the depositors/investors.
  4. The borrowing through issuance of Bond will form part of market borrowing programme of Government.
  5. Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.
  6. Know-your-customer (KYC) norms will be the same as that for purchase of physical gold.
  7. The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) and the capital gains tax shall remain same as in the case of physical gold.
  8. Bonds will be tradable on exchanges/NDS-OM from a date to be notified by RBI.
  9. The Bonds will be eligible for Statutory Liquidity Ratio(SLR). Commission for distribution shall be paid at the rate of 1% of the subscription amount.

To sum up, certain factors make these gold schemes attractive to the masses. They are as given under:

  1. The interest on the bonds will be paid on the investment value. Even if the gold prices move up, the yield will be calculated on the investment value and not on the mark to market value.
  2. It will relieve investors of the need to check the quality of gold and with the valuation, no longer an issue; these bonds will be easier to be used as collateral.
  3. Investors of gold bars and coins may find it easier as a better investment than holding physical stock because it will offer the benefit of gold without any handling and storage costs.
  4. In case of gold bonds, the counter party is the government of India. If the price of gold increases, the government takes the risk of higher prices, if they fall, the investor would be given an option to roll over their holdings for an additional period.