Saturday 24 October 2015

Seven Reasons why Gold Monetization Scheme will be a Spectacular Failure-VRK100-24Oct2015



Why Gold Monetisation Scheme 2015 will be a spectacular failure


Indians simply love gold--there is no rationale or logic--the buying decision is more of a psychological or emotional one. The same is true across the globe except in the US or a few other nations.

We love something tangible such as gold--we can feel it, touch it, kiss it, display it or wear it. You can also lend it or borrow money against gold ornaments. Gold as a financial asset is not very successful in India.

Government and regulatory authorities say gold is an unproductive asset. But most of the Indian public doesn’t buy this argument. Their lust for gold is enormous; nobody can change the views of the people.

Government’s sermons on discouraging Indians to buy physical gold won’t work. Indians see it as a highly liquid asset—though they get shortchanged routinely by gold merchants and jewelers in the form of less weight, higher rates, making charges and others.

Governments have no business to tell people what they want to buy or consume. They can’t say gold is undesirable for you. People are intelligent enough to make their own choices.

Many believe gold is a safe instrument in times of crises, war or other disasters. There is no point in fighting such views. Humans love for gold will continue forever—its demand may wane or rise depending on factors such as central bank policies, government fiscal policies, interest rates or financial crises.

Many Indians are wary of governments or their schemes. Because such schemes involve a lot of paper work and/or seen as a waste of time. Physical gold works as an insurance against the failure of governments in protecting people’s interests.

Gold may not have any intrinsic value, but as an insurance against the ineffective monetary policies of global central banks, physical gold acts as a perfect hedge in one’s portfolio as part of asset allocation.

P.Chidambaram, when he was finance minister, officially imposed several curbs on gold imports. As per official numbers, gold imports declined for some time. But gold smuggling has gone up. Net-net, the impact of gold curbs on India’s current account deficit is only minimal. The gold smuggled will reflect elsewhere in India’s imports.

Once the government loosens its curbs, Indians will buy more gold in a resurgent way. The suppressed demand for gold may rear its head in future.

Gold Monetisation Scheme 2015:

With a view to mobilizing physical gold from Indians, the Government of India last month launched a scheme named Gold Monetisation Scheme 2015, to be implemented by scheduled commercial banks across India.

In the words of the government, the objective of the scheme is “mobilizing the gold held by households and institutions in the country and to putting this gold into productive use.

India’s central bank Reserve Bank of India, a few days back, issued directions to banks on the implementation of the scheme.

   
Seven reasons why Gold Monetisation Scheme 2015 will be a spectacular failure:

1) Any government scheme comes with a lot of stupid and bureaucratic rules. Though GMS 2015 is a slight improvement over the old gold deposit scheme, the new scheme has its own share of complexity. If anything can’t be explained in one minute to a user, the product is bound to fail.

2) As the RBI circular on GMS shows, the product involves a lot of costs for banks. These high costs will deter banks from offering this product with a lot of enthusiasm—unless the Modi government batters this product on bankers’ heads the way it had successfully done with the Jan Dhan Yojana. Deposits under the Gold Monetisation Scheme will attract CRR and SLR—the statutory requirements of Reserve Bank of India.

3) Let us come to the user. Gold is the easiest conduit for black money in India. All the government’s evangelistic zeal for GMS 2015 will make users wary of its ultimate intentions. I mean the suspicion is that Modi government will try to target black money holders in the name of GMS. Indians are completely put off by moralizing (from the likes of P. Chidambaram and Arun Jaitley) which describe gold as unproductive. Most Indians including the poor hold gold as it’s highly liquid.

4) Indians have enormous lust for gold and gold ornaments. These gold bugs will not like their gold ornaments being melted into gold bars. This is the most deterrent factor of this product for the end user.

5) Banks may offer only two percent annual interest on this product. As such it’s not worth going for a product that offers very low interest. Under the current market conditions, there are a plenty of products that offer higher interest.

6) There are only 331 Assaying and Hallmarking Centres in India—and most of them are concentrated in South India. This number is too small for the success of this product.

7) Know-your-customer (KYC) rules are applicable for this scheme. When they hear KYC, more than 50% of the public will run away from the product! Without doubt, KYC is the most dreadful word in India right now!

Written with malice and jaundiced eyes against all governments:

Copyright © RamaKrishna Vadlamudi—24 October 2015.

Please read the following links for full details of the scheme:

1) Government of India notification on GMS 2015:


2) RBI circular on GMS 2015:


Disclosure: Gold does not form part of my asset allocation—that is to say I don’t own gold in any form.

Disclaimer: The author is an investment professional. The views are personal. His views should not be construed as investment advice. Before making any investments, you are advised to consult your registered financial advisor. The author will in no way responsible for the decisions taken by readers.

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