The Allure of Glittering Gold

Background: In pursuance of the decision to run blogs on topical subjects, ERTF chose Gold Market as the subject that could potentially elicit interesting yet different shades of opinion from domain experts.

Gold has historical, economic, social and cultural significance in our country. It is a store of value, a hedge against inflation and a safe-haven asset. This precious metal is a big-ticket commodity imported into India currently valued at approximately at $ 40 Billion a year.

There are many ways in which to invest in gold – physical (bars, coins, jewellery), derivatives (Futures and Options), Gold ETFs (Exchange Traded Funds), government-backed Sovereign Gold Bonds and so on. The benefits/advantages of investing in each one of the above vary.

There is a huge market for recycled gold.

Hallmarking of gold will promote quality assurance.

As Indian mines produce less than 5 tons of gold a year, India should explore investment in gold mining (China did some 20 years ago successfully) While gold import is liberal, gold export is highly restricted. Will a liberal gold export policy benefit India?

Despite being the largest importer (over 800 tons a year), India is a gold price-taker and not a price-setter. What should we do for India to become a price-setter? India has huge gold reserves (broadly estimated at 25,000 tons) held by households and various institutions (including religious institutions). Can we discuss ways to bring it overground to put it to productive use?

What is the effect of India’s Free Trade Agreements on the domestic gold market? These and many more questions are up for debate to help design a long-term stable progressive trade policy for bullion.

Views of a blog contributor ( who has sought anonymity )

Bringing a part of the large private gold reserve into the open for productive purposes. There may be multiple views.

• In India, gold is an emotive asset; and not easily parted with
• It is possible, that gold with households might have been purchased with unaccounted money or through unofficial sources
• Gold held by individuals/families may or may not have been declared
• To bring gold out of household vaults, several policy initiatives as under are necessary:
• A stable and long-term policy with appropriate incentives
• Sovereign assurance of no investigation whatsoever into the origin/source of funds
• No capital gains tax
• No change in the scheme for at least five years
• Anonymity for bank lockers / safe deposit vaults
• As gold is a non-interest bearing asset, schemes that provide an incentive (say, interest) for individuals/families to bring gold out into the open may elicit interest
• Interest rate may be similar to bank interest rate for Fixed Deposit
• Caratage of gold (14, 18, 22 carats) may have to be considered
• The person submitting physical gold in exchange for a legal document (say, certificate) must have the option to retrieve his physical gold in exchange (fungibility) and this facility must be government guaranteed
• The big question is: what will the government do with the gold that may come out through an incentive scheme