Gold Game-changer

Why India needs to take its gold stash more seriously!

The recently announced Gold Monetization Scheme announced by the government is a small step in the right direction. The call of the moment is a lot more aggression. Let us understand why India needs to take its gold stash much more seriously.

How big is the stash…?

There are no confirmed reports on the gold stash of Indian households. But conservative estimates put the number at around 22,000 tons of gold. Of course, most of this gold is largely heterogeneous in terms of form, quality, purity and value. But, that is off the point. The reality is that Indian households are sitting on a huge stash and they are normally unable and unwilling to effectively unlock its value.

Remember, 22,000 tons of gold at the current market price of Rs.2,850/gm is worth $ 1 trillion at the current exchange rate. Let me put this value in perspective. The value of household gold is equivalent to 60% of India’s market capitalization and 50% of its annual GDP. We have not even started talking about the gold held in temples under the control of trusts. If you add that value, the total stash could be much higher. But what is the moral of the story? This huge stash has to come out in the open. Even a fraction of this gold coming into macro circulation can make a world of difference to India. But how exactly can gold help?

The many things gold can do…

The typical response is that gold jewelry has a sentimental value and nobody wants to part with it. That is a flawed argument. If the price is right and the returns are lucrative, I am sure a good amount of this stash can easily come out. But first look at the benefits!

The households get an alternative asset class. Gold gets monetized and the money can be reallocated to other assets that can grow faster and yield higher returns. At the end of the day, the gold lovers can still revert to the yellow metal, if they want to.

The impact on the macro economy can be huge. The government no longer needs to depend on gold imports. The banks can meet this shortfall. Of course, there are concerns over purity, but the idea is to solve a part of the problem, not the whole. That will be addressed.

Lastly it will make a world of difference for banks. Gold deposits will qualify as SLR securities and so cost comes down. One can argue that banks hold excess SLR securities, but that may not last forever. Additionally, it opens a huge window for the RBI. Gold is probably the most universal of assets. The RBI can always fall back upon the gold reserves of commercial banks in the event of a currency crisis. Converting gold to dollars is easy. Almost like hitting 3 birds with one stone. Now for the urgency! ©

2 responses

  1. IMHO, this is a disaster decision. The author completely ignores the fluctuations of Gold Prices. What if Gold prices drop like what we saw in 2013? 30% drop could cause banks to be in severe distress and the economy to nose drive. Seriously, if it sounds too good to be true, you should run not walk.

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    • There are two ways to look at the issue.

      1. There is a dollar price of gold and there is a rupee price of gold, which we all get to see at the jeweller’s shop. The dollar price of gold has fallen by 40% since 2011 September, but during the same period the dollar has appreciated by over 30%. Hence the net impact in India rupees has been around 10%. That is why the price of gold you see at the jeweller’s shop has fallen from Rs.30,000/- per 10 gm to Rs.27,000/- 10 gm and not to Rs.15,000/- per 10 gm.

      2. Secondly, if you read the report closely, the redemption of deposit will be denominated in gold and not in rupee or dollar terms. If you deposit 20 gm of gold, then you get back 20 gm of gold, irrespective of what the price was then and the what the price is now.

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