Indians have a deep connection with gild and some of the temples are literally gold mines. May it be the sentiment of passing down ancestral jewellery or as a safe investment option, Indians have always found a good reason to buy gold. But is it worth it?
The problem lies in the fact that India doesn’t mine the gold instead it imports. As per statistics, India is the largest importer of gold with imports ranging around 800-900 tonnes with a vast majority of it goes to the jewellery industry. We are quite aware that economics doesn’t function in isolation and has a knock-on effect. So what is the hindsight of too much gold import? Well, we need dollars to pay off the gold purchases. As the demand for gold increases, the need for dollars also increases leading to the depreciation of rupee and appreciation of the dollar. This in turns makes other necessary imports like oil costly as the rupee keeps on sliding against the dollar. Point is we need oil for the sustenance of day to day activities and can do without the bling factor.
Gold has an emotional factor and people argue that it’s good for hedging against market volatility. Well, it took a virus to help us realize the importance of washing hands so it is rather safe to say that consumption of gold, in India can’t be curtailed. So what is the next best thing? Well, we always try to monetize the ideal assets and the government of India had the same thing in mind.
Apart from Start-up India, in 2015 the government came up with another scheme known as Gold Monetisation Scheme. Under this scheme, retail and institutional investors can deposit their gold in banks for a fixed term. In return, the bank will offer fixed interest and upon maturity, the bank will again hand over the gold to the investor. Seems simple and lucrative right? We can earn some money on the gold that’s sitting ideal. Well, that’s not the case.
The banks will not keep the gold with themselves. They will send the gold to the refinery where the refiners will smelt it, convert it into bars/ coins and send it back to the bank. So if you deposit your precious grandma’s jewellery, upon maturity you will get back coins (gold coins of-course).
Imagine that you agree to deposit the gold with your bank. The question arises, what does the bank do with the gold? It lends the gold to the jewellers for a fixed rate of interest. So banks basically earn the difference between the interest it’s paying the depositors and the interest it is charging from the lenders (as in case of a loan). This difference in interest or the spread is not enough to cover costs like smelting, transportation, storage etc. So there is no incentive for banks to pursue this line of credit business.
India is a country which runs on emotion, sadly you can not use that for transportation. On the other hand, gold is really a good hedge option used to minimise downward risk. Maybe we can come with another set of investments that can prove to be equally effective. Mortgage Backed Securities tend to have negative convexity thereby proving to be an effective hedge option. Maybe it’s time to expand the horizons, look beyond the traditional investments and avert this gold rush.
The Enigmatic Pen 