Gold — Specious plan to steal gold from private citizens
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Beware: Your gold is being stolen behind your back[/caption]
[Image Courtesy: businessday.com.au]
Gold — the precious yellow metal of which India can’t get enough of has made it the largest consumer of gold in the 3rd quarter of 2012. Consequently, it has stretched India’s import export balance sheet and our current account deficit is likely to be around 4%. Gold imports would account for 90% of this deficit.
Therefore, the clamour for reducing gold consumption has grown louder. The government, effective yesterday, raised the import duty on gold from 4% to 6%. Apart from this, an innovatively planned theft of gold from personal accounts of citizens has been unveiled by the Finance Ministry. The plan includes linking Gold ETFs and Gold Deposit Scheme.
Off late, Gold ETF has become an attractive form of investment sold by mutual fund companies. It is an instrument which lets you buy gold in electronic form instead of the regular physical form. You buy units, corresponding to 1g of gold, and trade them on the exchange as per the extant market price just like stocks of companies. This prevents the hassle of buying and selling gold in physical form which leads to a discount in price and heavy storage and transportation costs. These units are backed by physical gold with the mutual fund companies. Some ETFs allow delivery of physical gold meaning that you can redeem the units for actual gold.
People buy gold as a hedge for poorly performing economy and high inflation. The root of this buying mania lies in the abandonment of the Gold Standard which has led to loss of faith in the monetary system. People prefer buying real commodities, and a safe one, rather than a piece of paper whose value is depreciating by the second.
Among other forms of buying gold- coins, bars or jewellery, Gold ETF has many advantages leading to its recent popularity. If hedging or better returns is the chief reason behind buying gold, it makes sense to buy it in electronic form. To boost its acceptance, Government has done away with STT and Wealth Tax on Gold ETF. Now, the very same Government is acting foolish by perpetrating this robbery.
Under the Gold Deposit Scheme, banks accept gold deposits from clients which are further lent to jewellers and the like. At the end of the deposit period, the depositor is entitled to a return of physical gold or its equivalent in cash at the current market price of gold.
The ludicrousity of the plan is to link the two- Gold ETF and Gold Deposit Scheme. So the units which are backed by 100% gold lying with the mutual fund companies would be diluted to the extent of say 80%. The remaining 20% would be lent to banks under the Gold Deposit Scheme and they would further lend it to jewellers and traders. This in turn is expected to reduce the demand for gold in the open market as part of it will be satiated from the private deposits of unit holders. The unit holders would get interest on the gold parked with the banks.
So, if there is a run on the bank, like the one which happened with the Icelandic banks in 2008, the banks would not have enough money to return everyone their share. Similarly, if everyone rushed to redeem their gold units for physical gold, there won’t be enough gold to return. The investors are bound to realise the theft of their property legitimised by the stamp of approval of the government and would pull out their investments and put it in lesser desirable instruments like jewellery, gold bars and coins turning the very plan to reduce consumption of gold against it.
I sign off in hope that the little window of time we have before RBI and SEBI come up with their guidelines on the same, some sanity would prevail and this proposed futile policy is abandoned.
