Gold has been an ancient investment option. For time immemorial, it has been considered a store of value, greatly respected and desired. It is compact and, therefore, easily transported. It is not difficult to price gold, or to find out its purity.
Traditionally, paper currencies were backed by gold — called the gold standard — and a value was set for the currency based on the gold backing it had. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. The US abandoned the gold standard for the dollar in 1933 and completely abandoned it on August 15, 1971. Most nations abandoned the gold standard as the basis of their monetary systems at some point in the 20th century, although many hold substantial gold reserves.
Indians have had a passion for gold and that passion for glitter has remained strong over the centuries. India imported Rs 2.1 lakh crore worth of gold in 2014-15 and this excludes jewellery.
Gold comprises the bulk of India’s total imports with close to 900-950 tonnes of gold imported each year. It is estimated that nearly 22,000 tonnes of gold is lying in Indian households. This is at the cost of a lot of scarce and otherwise productive foreign exchange that leave Indian shores, only to be replaced with an idle and non-productive asset.
Gold is considered a non-productive asset, as it does not earn any interest or dividend. Jewellery costs more to buy than gold in the physical form in the market and fetches less when sold. Both gold and jewellery also have an additional cost of safe storage in bank safe deposit
Lockers:
A superior alternative to owning physical gold, in a manner that increases the investment return benefits and aids the Indian economy by cutting down imports is the gold monetisation scheme that was announced in Budget 2015-16. It enables an investor to earn some interest on the yellow metal as well as save safekeeping costs. Physical gold can be deposited in any form — jewellery, coins or bars.
Deposit certificates are issued against gold deposited with authorised banks. The deposit certificates earn interest based on the weight of gold deposited along with price appreciation of the metal value.
At the end of the term, the depositor gets back gold in equivalent of 995 fineness gold or Indian rupees as desired. The repayment, option, however, has to be exercised at the time of deposit.
What’s the process:
A depositor brings gold to the counter of a specified agency or authorised bank, which determines the exact quantity of the yellow metal and its purity in the presence of the depositor. The minimum quantity that can be deposited is pegged at 30 gm to encourage even small deposits. The depositor completes the KYC (know-your-customer) process and receives the deposit certificates for the quantity of gold deposited.
The gold may be deposited for a minimum of one year:
The designated banks accept gold deposits under short term (1-3 years) as well as medium (5-7 years) and long-term (12-15 years) government deposit schemes. Interest at the rate of 2.25 per cent or 2.5 per cent is paid depending on the term of
Deposit:
How does it work:
The deposited gold will be lent by banks to Metals and Minerals Trading Corporation (MMTC) for minting India gold coins and to jewellers at an interest rate little higher than the interest paid to the depositor, or sold to other designated banks participating in the scheme.
Earnings are exempt from capital gains tax, wealth tax and income- tax. There will be no capital gains tax on the appreciation in the value of gold deposited, or on the interest earned from it.
In the following example (see charts), we compare physical gold vs gold monetisation scheme. We have made following assumptions:
Gold quantity: 50 gm
Interest rate for gold monetisation scheme: 2.25 per cent pa; paid in gold
5-year investment period
Three price scenarios: -5 per cent, 5 per cent and 7 per cent
Bank locker charges for physical gold Rs 2,800 pa
Gold monetisation melting and other charges of Rs 900 for the total lot of 50 gm.
