Gold monetisation faces significant challenges: Report

World Gold Council said it is important that realistic expectations are set. Despite the significant stock of gold, little of it will be monetised anytime soon.

GN Bureau | January 25, 2017


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The outlook for gold monetisation is interesting. The flaws associated with the first gold monetisation scheme – most significantly the minimum deposit size – are not present in the latest iteration and there are certain structural developments that may help this latest scheme flourish, said the latest report of the World Gold Council.
 
First, there are more bank branches and more people have bank accounts than they did when the first scheme was launched.
 
Second, India’s infrastructure has improved. It has an accredited gold refinery, which can play an important role in this scheme by promoting trust in the gold flowing through the monetisation  ecosystem. And the launch of the Indian Gold Coin and the New Hallmarking Act will provide a trusted gold product and standard for use by the banking system.
 
But it still faces significant challenges. For the scheme to be a success it needs to address the key issues we have highlighted: trust, ease of use, incentives and infrastructure. If any of these are overlooked, the scheme may struggle.
 
It is important that realistic expectations are set. Despite the significant stock of gold in India, our view is that little of it will be monetised anytime soon. It will take time to build the necessary infrastructure, for banks to develop and market the right products, and for customers to respond. Once that infrastructure is in place greater volumes of gold can be monetised; we envisage up to 25t being monetised within the next two to three years.
 
 
The report added: “We expect gold loans to continue to play a significant role in India, especially in rural communities. The make-up of the sector will evolve as the government presses ahead with its financial inclusion policies and the formal sector plays a greater role. Money-lenders and pawnbrokers could lose market share to banks and gold loan companies. Within the formal sector, because of tighter regulations governing gold loan companies, we can see a subtle shift in favour of banks.”
 
World Gold Council said that India has a huge stock of gold; some 23,000–24,000t in total, the majority of which is with households. And it is incredibly valuable. Based on the 2015 average price it was worth US$800bn. To put this in context, Apple’s market capitalisation at the same time was around US$600bn; two of India’s largest listed companies, Reliance Industries and Tata Consultancy Services, were quoted at around US$50bn each.
 
In the late 1990s, the Government tried to capitalise on this gold – to draw it out from households and into the financial system – with the launch of the Gold Deposit Scheme (GDS). This allowed individuals to deposit gold at banks in return for interest. In addition, the scheme was exempt from capital gains, wealth and income tax.
But it did not work. Between 1999 and 2015 only around 15t was mobilised. The big stumbling block was the minimum deposit, which at 500g, prevented many individuals and households from accessing the scheme.
 
In the 2015 union budget, finance minister Arun Jaitley announced plans for a new, updated monetization scheme.
 
 
 
 
 
 

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