India’s Gold Monetization Scheme

India’s Gold Monetization Scheme.

India’s plan aims to reduce gold demand in physical form.

The Indian Goverment will entice its citizens to turn their gold in exchange for interest bearing Sovereign Gold Bonds.

Will it work?

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Update November 18, 2015: India’s gold monetization scheme a total flop so far

India Plans To Wrest the Gold From its Citizens

It is estimated that Indian households are in possession of over 20,000 tonnes of gold. The Indian goverment itself has under 600 tonnes. India plans to monetize some of its citizen’s gold under a plan recently passed by the Indian government. Under India’s gold monitization scheme the government hopes to entice Indians to turn in some of their gold for interest bearing bonds.

Gold monetization in India won’t be easy.

In the west, incessant gold bashing in the main stream media – it doesn’t pay interest, it’s not a safe haven, it’s a pet rock and it’s a 5,000 year old bubble – have helped relegate gold to an often derided, out of favor and under owned asset.

In India, however, it is a different story. Gold held in physical form is revered and part of Indian culture. There are gold giving holidays in India and gold is involved in significant life events.

Indian gold demand remains near an all time as an increasing population with growing incomes continues to clamor for gold.

Central bankers don’t like gold as it disrupts their central planning and economic interventions. Gold threatens to undermine national fiat currencies as it is not based on the sustained confidence of issuing nations and their central banks’ monetary policies.

As we wrote in “Gold vs. World Currencies“:

Gold doesn’t default, threaten to default, change governments, debase, or stimulate. Gold conducts no monetary policy. Gold simply is. It stands at the center of fiat currency experiments, all of which have failed in the past to dethrone gold as the world’s most valuable and lasting currency.

Gold vs the indian Rupee 1996-2015 chart

Gold has appreciated significantly against the Indian Rupee over the past twenty years, or rather the Rupee has depreciated vs. gold.

Gold is rare, divisible and has no counterparty risk. As such, gold has been desired as money for 5,000 years. Gold is also sought for its shimmering beauty in order to craft jewerly and adornments.

India’s love affair with the yellow metal has been a thorn in the side of India’s central bank, the Reserve Bank of India (RBI). Indians’ insatiable demand for gold messes up India’s import/export balance as India has no significant gold mining industry and therefore imports large amounts of gold. To combat this, the Indian government has placed excessive import duties on gold that have been largely ineffective as such import restrictions have merely served to fuel black market gold imports.

Recognizing this, the Indian government eased some of the gold import duties in late 2014.

There is a scheme to get Indians to become less interested in acquiring gold AND to get them to part with the gold they currently hold. With incessant anti-gold propaganda, coupled with an interest bearing bond offer, the government of India hopes to change its citizens’ view towards gold and eventually get them to hand it over to the RBI.

Media Gold Bashing in India

Beause gold is revered in India, it needs to be demythologized. Stories urging Indians to drop their superstitious atrraction to gold have been seeded in the Indian media. (analogous to the west’s urging of investors to drop the “Barbarous relic“). In short, Indians need to get with the times.

Gold is old. Monetiztion is modern.

Besides, demand for gold in India is “tepid” and supply “ample”. Gold demand in India is “weak” and “low”.

At least that is what Indian news sources and international news sources have been reporting.

The facts indicate otherwise as this chart shows:

indian gold imports chart 2008 - August 2015

India imported 126 tons of gold in August of 2015. With gold import restrictions lifted, India is heading towards gold imports of approximately 1,000 tons in 2015 on an annualized basis or approximatley 35% of global gold mining supply.

Click to see updated Indian gold import charts.

Such is the demand for gold, that Indians pay a hefty premium for gold.

indian gold premiums chart through september 2015

Indians have been paying significant premiums for gold since early 2013.

The Indian Gold Offer – Too Good To Refuse?

In early September 2015, the Indian government passed a gold monetization scheme.

Under the monetization scheme the Indian government would issue “Sovereign Gold Bonds” in denominations of 2, 5 and 10 grams or other amounts for terms of five to seven years. Indians would turn their gold into the bank in the amounts of the bonds and receive interest in exchange during the terms of the bonds.

Indian Finance Minister Arun Jaitley explains:

“The deposit tenure would be short, medium or long term and if the idle gold is deposited in banking system then at the time of redemption people can get the actual value of gold and physical gold can be obtained if it is a short-term deposit. Besides, people will also get the interest.”

The interest earned on the Sovereign Gold Bonds would be exempt from income and capital gains taxes.

A Boost to India’s Gold Reserves?

The gold collected from its citizens will be used in auctioning and replenishing the RBI’s gold reserves.

india's gold reserves as of 2014 chart

Indian gold reserves stand at 557 tons, the tenth most among nations.

Will India’s Gold Monetize Scheme Work?

At present, Indian’s gold monitization scheme is voluntary. The Indian government aims to retrieve some of the estimated 20,000 tonnes of gold that Indian households possess. The western media is already crowing that the “Outlook for gold bulls gets worse” because India is going to monetize gold and curb demand.

For India’s gold monetization plan to be successful, it doesn’t have to abolish India’s gold culture, it would only have to wrest a small percentage of that gold from its citizens. Offering Indians a way of earning interest on their gold, overcoming a common objection to gold as an investment, may appeal to some, if not many, Indians.

Gold once was part of Americana. Gold jangled in American pockets as currency until 1933. It was noted in the United States Constitution. Gold today, in America, however, is now derided in many circles as a tin foil hat obsession.

How will Indians view gold ten, fifty or eighty years from now? Will they still hold it in physical possession or will it be mostly in RBI Sovereign Gold Bonds?

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Indian Gold Import Sources: Ministry of Commerce and Industry, Govt. of India (via Sharelynx) and Bullion Star

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Further Reading:

India and Gold

Indian Gold Charts

Gold Reserves by Nation

What India’s Gold Monetization Program Means for You

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