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Gold Investment Essay

2321 words - 10 pages

Gold bonds right solution to reduce gold imports
7 Feb, 2013, 0325 hrs IST

Also, traditionally, gold jewellery is seen not as an investment tool, but more as a symbol of social status, fashion accessory and family possession.
By: Jignesh Shah

It is common knowledge that by tapping Indian household gold through gold bonds, the country can reduce imports of the yellow metal significantly. However, gold bonds have so far failed to fetch good response. And there are many reasons for this. Indians have a passion for holding jewellery. They do not wish to part with their ornaments.

Also, traditionally, gold jewellery is seen not as an investment tool, but more as a symbol of social ...view middle of the document...

So, there is also talk that government may announce voluntary disclosure scheme or amnesty scheme — subject to one-time tax at a lower rate —to make the scheme more attractive. In case the government announces such a decision, it may attract deposit of huge quantities of gold under the scheme.

Many people having unaccounted money in the form of cash or real estate may convert such black money into gold and then deposit it to secure gold bonds under the amnesty scheme. Again, this would lead to increase in demand for gold. So, what is the right solution to reduce gold imports? In India, demand for gold originates from three sources:

DEMAND FOR JEWELLERY 

Given our culture, it is not possible to reduce demand for jewellery in India. People will keep on buying jewellery — for marriages, gifts, social rituals, ornamental or fashion accessories — whatever the import policy. Over the last 3-4 years, government has raised import duty on gold multiple times. Still there is no impact in terms of import of gold.

The only significant impact is that cases of gold smuggling have increased. A retail investor, or aam aadmi, does not bother much about import duty, because he always looks at final retail price that is inclusive of import duty. Since the price fluctuation in gold is more than 1-2% every week, a retail investor is not able to figure out the impact of increase in import duty on the final retail price.

Hence, a higher import duty does not result in reduction in consumption or import of gold. Still, there is a silver lining. With an increase in gold prices, demand for gold in quantitative terms has gone down, especially in middle-class families. In Indian marriages, generally, there is a specified budget for jewellery, say .`5 lakh. Within this budget, the family buys jewellery, irrespective of the price.

Also, if we increase awareness about low-carat, machine-made, branded jewellery, demand for gold may come down. In India, low-carat jewellery is considered inferior. But with increased awareness, this mindset can be changed over a period of time.

INVESTMENT DEMAND FOR GOLD 

People also invest in gold for price appreciation, savings and investment of surplus funds or even preservation of wealth in the form of gold bars. But there is substantial scope to reduce gold demand by providing an alternative instrument that is more attractive than gold. In general, about 30-40% of gold import is attributed to investment demand.

By launching an attractive scheme with USPs, it is possible to significantly reduce this portion of import. This can be achieved by launching a Gold Bond Scheme that has the following features: The proposed scheme should target the segment of fresh investment in gold, that originates from investment demand. It should not target the existing household stock of jewellery.

The proposed Gold Bond Scheme should offer a proposal to Indian citizens to deposit cash with the designated agency and get a gold bond....

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