Recently GOI released the draft of Gold Monetization Scheme. The general public can share their views on draft Gold Monetization Scheme on or before 2nd June, 2015. As usual my financial planner friends passed their verdict on the Gold Monetization Scheme even before it is launched. In fact, some of them also suggested whether to invest in this scheme or not. Whereas other passed judgement whether the scheme will be a success or a failure. My dear friends forgot that Govt has only released the draft of Gold Monetization Scheme. Based on the inputs from the general public, banks and all other stakeholders the final scheme will be launched. The final scheme may or may not retain the draft provisions. There is a possibility that final Gold Monetization Scheme might be completely different from the draft. By passing their verdict at the draft stage shows the immaturity and lack of understanding. Secondly, most of the financial planners are passing wrong info to the General Public. They are also responsible for creating wrong/negative perception about the Gold Monetization Scheme even before it is formally launched.
At this stage, it is important to communicate the objective of Govt of India to launch Gold Monetization Scheme. I am sure that if we will pass the right message then Indian Investor is intelligent enough to decide whether to opt for Gold Monetization Scheme or not. Let’s check out the reasons, why Government of India is planning to launch Gold Monetization Scheme. What are its implications on Indian Economy?
Gold is a Non-Productive Asset
As i highlighted in my post, Dream Home vs Gold – Productive vs Non-Productive Asset that Gold is a Non-Productive Asset. At best, Gold in a financial portfolio act as a hedge against inflation. It should not be more than 15%-20% of the financial portfolio. According to rough estimates, Indian household and other trusts are holding 20,000 tonnes of Gold. It is not a good scenario for any economy. One of the objectives of a Gold Monetization Scheme is to unlock the value of this non-productive asset. The unlocked value can be routed/circulated to productive assets like Real Estate, Financial investments like Stocks, Debt, MF etc. For a healthy economy, the contribution of non-tangible assets like financial investment should be at least 40%. Whereas Indians believe in investments in tangible assets like Gold and Real Estate. Gold Monetization Scheme will help to correct this skew through redemption option. Interest Payment option under this scheme will be “valued in gold”. For example, if i open Gold Savings Account & deposit 100 gms gold. Assuming the interest rate is 2% then i will get 102 gms of gold at maturity.
Black Money and Gold Monetization Scheme
It’s a known fact that Gold & Real Estate were safe havens to park Black Money. Gold Monetization Scheme is a good way to unlock the black money parked in the form of a gold. As the Gold returns are in negative territory therefore timing of the Gold Monetization Scheme is strategic. Currently, hoarders are also finding ways to either exit or convert it into a sort of productive asset.
Current Account Deficit
Depending on the success of Gold Scheme, it will increase the supply of Gold in the market. Which in turn will reduce the import of Gold? Lower import of Gold will help to control the current account deficit. Current account deficit is not good for the economic health of the country. It means higher outflow of the dollar compared to dollar inflow from exports. Current Account Deficit of last 2 years is 4.2% and 4.8% respectively. India’s major import bill is of Gold and Crude Oil. If import > export then it increases the demand of dollar, therefore, depreciates Indian Rupee. Depreciation of Indian Rupee will increase the inflation. Gold is a hedge against inflation therefore in case of high inflation people will buy more gold. The increase in Gold demand will further increase Current Account Deficit, therefore, its a vicious cycle. To control this cycle, it is important to control the demand of gold.
Boost to Jewellery Sector
Currently, the big jewelers buy gold from gold importers or trading houses. Small jewelers buy from big jewelers. Gold Monetization Scheme will facilitate the availability of gold through banks on the loan. Gold will be treated as a Raw material for Jewellery sector. Thus, it will finish the monopoly of gold importers. Secondly, if the jeweler will buy gold on loan from the bank then it will slowly bring the stability in Gold Prices. Speculators will be out of business. Banks can also convert the gold deposited under Gold Savings Account to Gold Coins and sell to their customers.
Gold Prices will come down
If Gold Monetization Scheme is successful then there will be a sudden increase in the supply of gold which in turn will decrease the Gold Price. Therefore, Gold Monetization Scheme is a good news for people who are waiting to buy gold at the lower price provided the scheme is a success. It has a flip side also. The drop in Gold price may result in out of proportion increase the demand which will defeat the whole purpose of launching this scheme. Therefore, the government should control the gold deposits in Gold Savings Account.
Conclusion: It will be interesting to note how the govt will handle the black money converted to gold. Whether Gold Monetization Scheme will be sort of amnesty scheme for general public to declare unaccounted gold lying in the lockers. Secondly, Gold is a Women’s best friend and is mostly in the form of jewellery. At the time of purchase, jewelers cheat and the final cost is almost 20%-25% higher compared to the actual cost due to making charges, wastage etc. I highlighted in my post, How Jewellers Cheat Customers. Therefore, it will be a double penalty if the ornaments and jewellery will be deposited under Gold Savings Account as the investor will receive only Gold Value.
You can submit your views on Gold Monetization Scheme at https://mygov.in/
Overall, it’s a good scheme from financial planning perspective. As it always advisable to hold 15%-20% of total portfolio value as a Gold. Gold ETF is much simpler, cost effective and convenient way to hold gold compared to the physical jewellery/Gold Coins. You can read my post Why you should not buy Gold Coins from Banks? Among all form of gold, Gold ETF is most suitable for investors.
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