How to strike gold: You may soon buy, sell, collaterise yellow metal

The government proposes to treat gold as a financial asset on par with equities.

A group of union ministers is expected to meet in the next few days to consider a comprehensive policy aimed at making gold an asset class. In November 2015, the government announced the gold monetisation scheme to indicate its intention of bringing idle gold into the system around 25,000 tonnes, which in value is about 45 per cent of India’s GDP.

By bringing gold for productive use, the government accorded it the status of an economic asset. However, it simultaneously announced the interest-bearing sovereign gold bond scheme, making the metal a financial asset as well.

Assets are those that give investors some returns on the money invested in them. You also have physical assets such as plant and machinery in manufacturing companies, in which the returns are not direct but come in form of profit.

There have been several suggestions before the government to treat gold as a financial asset. Sovereign gold bond is just one. The gold monetisation scheme of November 2015 was actually making gold a financial asset, as it involved opening a deposit account by those tendering gold under the scheme.

Gold as a financial asset

The government is proposing to regulate gold in the way other financial assets, such as equities, are regulated. Equity shares are held in dematerialised form, in demat accounts. While such a mechanism has not been feasible in the case of gold so far, the government nevertheless proposes to formalise gold trade. 

The government has proposed holding gold in a depository account through which one can offer use it for GMS, sell it online on the spot exchange or sell it back to the issuer of the metal. Eventually, it is all in one place and government gets to keep a watch on it. Once the concept catches up, it is proposed to make it mandatory. 

Let's say you have bars totalling 500 grams; you can get their quality revalidated and then move them to a demat account, where they will be held with a custodian. A repository, like the depository in financial assets, will keep record. You can use this anytime while going to a jeweller, and can also transfer it online to the jewellers account, against which you can buy jewellery. Or you can offer it for sale in the market (eventually on the spot exchange when it is becomes operational and open to retail investors). You can buy gold in digital form on any electronic trading platform. If you want to collateralise it against a loan or for other purposes, you can simply do it sitting at home.

Initially, all this can be done for all fresh gold purchases and that too simultaneously with normal trading. This is something similar to demat of equity shares. Launched in 1997, it took 22 years for regulator to rule to that from now on, no physical shares can be transferred.

Govt's gold push

However, for this the government will have to only allow sale of gold by accredited refiners, or by bankers who import refined gold, or all gold offered on sale on an electronic spot exchange platform in which all required infrastructure such as repository, trading or buying-selling platform and vault facilities are ready for use.

According to a source privy to the proposal, even jewellery can be a part of the scheme. Before that, however, mandatory hallmarking of jewellery has to be implemented nationally.

For formalising gold trade and investment or making gold as an asset class, there should be compulsory registration of buying and selling gold. It can only happen through marking number on gold bars and UID no on jewellery. Such measures are seen difficult to implement.

Gold has an unaccounted business window. From that context, a market veteran explained, “This move (to formalise gold trade, investment and holding) will make unaccounted gold cheaper in the market and there will be two rates of gold -- one for gold which has bar serial number (or held in depository) and other which doesn't. This move can make non serially numbered bars or unaccounted gold cheaper by 10-15 per cent.”

The Group of union ministers, which is meeting mid-week to finalise the gold policy, will have to approve setting up of a Gold board, a spot exchange with all infrastructure required for supporting its ecosystem, deposits scheme giving gold-linked returns and many more proposals mooted earlier.