New Glitter For The Gold Markets
Banks are readying a number of gold-linked financial instruments
India hoards more than eight per cent of the gold that has ever been mined in the world. In figures, that works out to 9,500 tonnes of gold worth about Rs 4,930 billion. But the market for gold has remained unsophisticated, and that for gold-linked financial products, undeveloped. All that is set to change now.
The harbinger of change is EXIM Policy 1997-2002 which introduced the concept of gold banking. Many banks like the Bank of India, Standard Chartered, ABN Amro, Bank of Nova Scotia, Canara Bank and the Indian Overseas Bank have already started importing gold and selling it on a wholesale basis. But consumers will have to wait for the really exciting part the retailing of gold to individuals, expected to take off around the middle of the next financial year.
Let us look at some of the schemes being considered. (Those who believe that gold prices will keep going down should no read no further, because if they do, you will lose money on all these schemes.)
The Gold Accumulation Plan (GAP), already tested and found successful in Japan and Malaysia, will be the first gold-linked financial product to be introduced in India. R V Joshi, general manager, Bank of India explains how the scheme works: In very simple terms, it will be a recurring deposit in gold. Under this scheme, you will have to deposit funds with the bank at periodic intervals (monthly or quarterly) for a period ranging from two to five years, as in a recurring deposit. The amount to be deposited will depend on what you want to get at the end of the term, as well as the gold prices on the day you make the deposit. If, say, you want 240 grams of gold at the end of two years then you will have to pay the actual price of 10 grams of gold every month for which the bank will give you the best quote of the day. So you may pay Rs 4,500 in the first month and Rs 5,000 in the second month and so on for the next 24 months.
But if you are looking at simply investing surplus savings in gold to be used later, then you could pay a fixed amount of, say, Rs 1,000 for the next five years on a monthly or quarterly basis as before. The bank will then buy for you as much gold as they can at the best rate possible, which would be the price on a daily or weekly basis for the amount deposited, and this will be indicated in a statement given to you at the end of the month. Adds Joshi, These quotes will be based on the spot prices of gold quoted at the London Metal Exchange (LME). When the deposit matures, in both cases the principal and the interest (which would be around one to two per cent) would be returned to you in gold terms. In other words, you would receive a lump of gold (of 99 per cent purity) for the amount due to you.
Entering into such a plan promises multiple benefits (assuming, of course, that gold prices do not keep falling). For one, the gold would be in the safe custody of the bank (as with a locker). Second, it could earn you a nominal rate (one to two per cent) of interest as well. Also it could solve the problem of having to melt old jewellery for new since the bank will give you a lump of pure gold.
Says a senior RBI official, An offshoot of this would be a Gold Denominated Deposit (GDD), normally available for tenures upwards of two years, which would function in exactly the same way as these other schemes. It is also expected to make a quicker appearance than GAP. As far as returns are concerned, both GAP and GDD schemes are similar because the interest rates are the same. The only difference is that with the GDD, the customer can choose to receive cash instead of gold. This would be useful for a person who does not want to go to the trouble of actually getting the jewellery made, but would like to be able to purchase it ready-made.
What you are doing in the GDD scheme is selling the gold back to the bank (again for which the bank will give you a quote based on LMEs rate for the day) on the day the deposit matures. Here the depositor stands to gain if the price of gold moves up as he gets both capital gains as well as the interest. This also means that the banks will offer two-way quotes (buy/sell), but benchmarked by the LME rates. Although the finer details of these schemes remain to be worked out, the banks have indicated that since they are offering two-way quotes, the schemes would probably be open-ended, allowing customers to withdraw from the scheme before the end of the tenure.
Says Derrick Machado, financial institutions manager, World Gold Council, The other possible options are the gold certificates or gold bonds which, although feasible, will take more time. Here the idea is to accept idle gold from people and put it to productive use. The scheme will be similar to the Gold Bond Schemes which State Bank of India introduced on behalf of the government in 1962, 1965, 1980 and 1993. In these schemes the bank accepted gold in any form in return for gold bonds. These bonds had a maturity of 15 years with an interest coupon of 6.5 to 7 per cent and were initially repaid in cash, but in later issues as a lump of gold of standard purity. But says Joshi: This requires a good hallmarking or certifying system, developing which will take very long. Also, the investor who deposits his jewellery normally expects to get it back in the same form, so when he is given either gold or cash he is not satisfied.
Joshi says another scheme expected to make an appearance is the Gold Loan Scheme. This scheme will be aimed at goldsmiths and jewellers and will help insulate them against price risks. Normally, when party A agrees to sell gold to party B, the sale price is decided only when party B gets the delivery (unless there is a forward contract agreement). Which means that if a jeweller buys gold today and makes jewellery with it, and if the prices of gold go down, he ends up losing. Because the customer will pay for the gold only at the price prevalent on that day.
To enable jewellers and goldsmiths to avoid huge investments and to protect them from a price risk, the bank steps in and loans the gold for an interest cost. At the end of the loan period, the jeweller will have to repay in gold of the same quantity along with interest which could be either in gold or cash. Given that gold interest rates are very low (two to four per cent) and because the jeweller will be repaying the gold at the same rate at which he charges the customer, it would insulate him from the price risk.
Says Joshi, We can expect more transparency than with your local jeweller since the purity of gold is assured.