Gold savings scheme could erode India's gold demand
Mar 10, 2015 02:22 GMT Source:Scrap Monster
Tags: India gold demand, gold savings scheme
Author: Paul Ploumis09 Mar 2015 Last updated at 07:31:22 GMT
NEW DELHI (Scrap Monster): The success of gold savings plans proposed in the Union Budget is likely to erode the physical demand for gold in the country. Incidentally, the country’s gold market regained stability after remaining volatile post announcement of new schemes on February 28th. The erosion of gold demand in India may have significant influence on global gold prices, as India still continues to be one of the top two bullion markets of the world along with China.
As per the proposed gold monetization scheme, customers could deposit their idle gold under the safe custody of bank. The deposited gold will earn interest too. Previously introduced gold monetization schemes had been failures on account of lower interest rates. However, the proposed scheme will pay higher interests in order to achieve maximum monetization of the household gold. The banks in turn will be allowed to lend this gold to jewelers. This will cut down the country’s gold import bill. The customers, upon the end of deposit period, will be paid equivalent gold in the form of bars.
The gold sovereign bond scheme allows customers to purchase gold bonds instead of physical gold. Upon completion of the bond term, the bond can be redeemed at the market value of gold on the date of maturity. Additionally, the bond scheme will offer interest on the amount invested. The bond scheme avoids unnecessary gold imports into the country. The underlying physical exposure to gold could be secured by hedging prices.
According to estimates provided by the World Gold Council (WGC), Indian households own nearly 20,000 tons of gold. Even if the gold savings schemes are able to attract 5% of the idled gold stash, it would bring in enough gold to meet the country’s annual demand for the yellow metal. The Indian gold imports had totaled 769 tonnes during 2014.