This is Diwali time and as my family many of you will see your family gold that will be released from lockers and safes for LaxmiPuja. We Indians are classics when it comes to gold. All traditional investor fancy it, generations pass it, and everyone has it- You, me, your relatives, my relatives and above all the temples in our country. We do not wear it; we do not trade it, but we just accumulate it. Although people argue that no one wears gold these days, the import of gold shows a different story. India is a net importer, means- we need more gold than we produce domestically! And what does it yield?
It is not a hidden fact that gold has not beaten the inflation. Hence, it is a negative asset. But still as a country we have it in tons… If you ask me I have stopped purchasing gold since last ten years as I don’t see any usage in future, but honestly admitting, I have a locker running to keep safe the family and gold received my wife at our wedding. But I think I will save the locker cost starting this year…
Introducing the Gold Monetization Scheme 2015
The Government of India (GOI) is all set to solve this Gold Love Problem that we have. Very soon the Gold Monetization Scheme will be launched in which the investor will get interest on the gold that they wish to deposit with the bank or financial institution. It is very much like the savings bank deposit, but here you will get interest on gold in place of cash. The scheme was announced in Budget for 2015-16 and finally announced on September 15th and gained popularity when PM Modi introduced in his Mann Ki Bat Program.
Features of the Gold Monetization Scheme
- The gold can be deposited by Resident Individuals, HUFs, Trusts, MF/ETF Companies.
- It can be in the form of bars, coins &jewelry excluding stones and other metals.
- The Lower limit is 30 Gms Gold with 995 fineness and no upper limit.
- Banks will accept the gold offered by investors. The gold has to be certified by Purity Testing Centers certified by Bureau of Indian Standards. They will issue the purity certificate. As on March 31st, 2015, 331 centers have been certified pan India.
- There are three terms prescribed: 1-3 Years as short duration deposit, 5-7 years medium term deposit and 12-15 years as long term deposits.
- The GOI will announce the rate of interest in coming 7-15 days possibly before Diwali. As estimated by market participants it will be in therange of 2 on the lower side for short duration deposit and can go high as 2.5% for long term deposit. Banks are free to decide the rate of interest. Bothe the principal and the interest will be ‘valued’ in gold. So if a customer deposits 100gms of gold at 1% interest for one year, he will get maturity credit of 101gms.
- The investor has to comply with KYC formalities of the bank.
- The clause for premature withdrawal and penalty will be announced by individual banks when the scheme is launched for subscription.
- The investor will have the option to take gold or equivalent rupees as per prevailing rate of the gold. The option will be decided while making the deposit.
- The rules regarding joint holders and nominations will be same as bank deposits/accounts.
- Since banks will offer the deposits, the grievances and complaints will be handled by RBI’s Banking Ombudsman.
What happens to Gold that you deposited?
The gold received by the bank will be melted down and can be used by banks to fulfill statutory liquidity deposit (CRR, SLR), may sell to generate foreign currency, convert to coins to sell, trade through exchanges and lend to jewelers and earn interest.
Emotional Point to ponder: a lot of us have emotional linkages to jewelryespecially which is received through gifts or received from elders. So reactions are still awaited as the government is targeting the same gold reserve. Will we get practical enough to allow melting of a long time treasured gold? If not, the scheme may not be a hit.
So this how the system will function under GMS 2015:
So this is how you can open GMS account
Step1– The investor goes to the bank to open a Gold deposit account with the physical gold. He is directed to the assigned Purity Testing Center for preliminary checking.
Step 2– The center will conduct the preliminary test (XRF machine-test) and will intimate the investor of the approximate weight of gold. If he agrees, he will do the KYC and consent to melt the gold. If not, he can take back his gold.
Step 3– The same collection center will clean the gold of dirt, other metals, meena, studs, etc. (these are handed to investor there itself) and net weight will told to the investor. The gold will be melted in front of him (viewing galleries will be provided) using the fire assay and purity of will be ascertained immediately
Step 4– When the investor receives the result of fire assay test, here also he can refuse to deposit taking back his gold by paying nominal procedure charges. If he decides to invest, he receives a certificate of weight and purity of the gold. The center also reports to the bank. The investor approaches the bank with certificate and account is opened.
What does GOI get out of this scheme?
India has imported on an average 858 tons of gold every year from 2012 to 2014. This year we have already crossed 661 tons by September and expected to cross 900 tons. And we hardly produce anything indigenously, making our fiscal deficit go negative and outflow of foreign currency. The GMS 2015 is expected to monetize gold worth 60 Lakh Cr. Hence, import of gold will go down and save the valuable foreign currency.
Please share what you feel about this scheme. Are you excited to open and account or you have some reservations? Feel free to express your views and ask question in the comments section.
Just a quick read didn’t give me a feel of this being an alternative to lockers. Mainly because it is not a deposit scheme where you will get back your gold in the same form (especially jewelry where emotions come into picture), as it will be melted. Probably good option for your existing gold bars/coins etc. More of an alternative to Gold ETF for fresh investors, isn’t it?
Dear Shantanu,
You are correct as investors with emotional attachments to the gold will not find this scheme suitable. An investor who has collected a good number of gold coins on Diwali etc. will find this good investment. It will be an interesting comparison with ETF, as this scheme is meant to provide you some benefit over gold already in possession. But ETF is an initial investment in gold itself.
Hope you like the posts on TW2 (thewealthwisher.com).. Pls keep sharing your views.
Thanks Madhupam.
Difference as I see is – in ETF you get the benefit of only appreciation of gold price whereas if you buy physical gold and keep it monetization scheme you get the benefit of appreciation as well as the interest.
That’s correct Shantanu… and that is why the government wants the old gold to benefit its balance sheet in exchange of sharing some returns with the investors. But I doubt someone would just buy gold to monetize it for just around 2% or so. Is gold so attractive as an asset class?
It was in reference to alternative for ETF. Say based on this years investment goal/plan certain percentage needs to be invested in gold ETF, I would surely think of buying physical gold and monetizing it instead of ETF.
Yes if need to buy gold as part of asset allocation, an extra bit can be earned through GMS.
I am a part of jewellery industry as a leading retailer in b’lore.
i find this scheme to be good, but the rate of interest which would be provided should be more attractive infact they should go parallel to the rate of interest provided in FD, but here with a fee ofcource as here the medium of investment is a physical gold which will have logistics attached to it. here instead of cash or electronic money the amount is in form of gold so i feel gold also should be treated as cash money rather than just an exchange commodity, only then the scheme will be of greater success. The intentions of the ruling GOI seems good….must appreciate !!!
Dear Rishi… The rate is not so attractive because the government knows that we are smart people and instead of fixed deposit the investor will buy gold and then monetize it to earn from both- the interest on gold and the appreciation. and if this starts the imports will increase and the entire purpose of the scheme gets bowled out. Thanx for your comment… do keep coming back…
i guess u r right, we indians are really smart, this was the possible the other angle where my attention did not go….thanks to highlight it to me …….
you provide us very important article that where we can invest easily. thank you so much for this article.
Hi Swati… Thanx for liking the post.. very soon you will find TW2 revamped as I am working on it. Keep learning and spreading.. Thanks again.
Hi, great article.
Unfortunately I am a victim of low cibil score and was looking measures to improve it as I also wanted to avail a personal loan to renovate my house. Please suggest me as the banks keep cibil score as the fundamental factor in giving loans
Hi, try getting a loan for from an NBFC as they have a bit relaxed norms. But in case CIBIL is completely in a deplorable situation, pls work on it for some time before availing a new loan.
Thanks for your advice… Madhupam Ji
I am constantly reading about cibil score because increasing it is has become immensely important for me.