What India’s Gold Monetization Programs Mean For Gold?

The Indian government launched three gold schemes in November.  What do they mean for the gold market?

India is the largest consumer of gold in the world, accounting for around 26 percent of demand in 2015. Since India does not produce any gold, the country has to import all the yellow metal. In order to stop the outflow of foreign currency and to decrease the current account deficit, the government introduced three gold schemes: Gold Coin, Sovereign Gold Bonds and Gold Monetization Scheme (GMS).

The Indian Gold Coin is simply the first national gold coin, which will have the national emblem of Ashok Chakra engraved on one side and the face of Mahatma Gandhi on the other side. Sovereign Gold Bonds are government securities denominated in grams of gold, bearing 2.75-percent paid semi-annually, on the value of gold deposited initially. On maturity, the redemption proceeds will be equivalent to the prevailing market value of grams of gold originally invested in Indian rupees.

The aim of the Gold Monetization Scheme is to mobilize the gold lying idle with households and trusts and deploying it for “productive” use. It is the fixed deposit scheme for gold, under which people would deposit their gold and earn interest rates up to 2.5 percent on their gold. Then, the mobilized metal would be loaned by banks to jewelers to make jewelry.

The Indian gold schemes should not have significant implications for the gold market. They may reduce the import of gold, but probably not dramatically, as the yield of 2.5 percent may not be enough to prompt people to deposit their jewels (which are often a gift or inheritance from the ancestors) and compensate the risk of the nationalization of gold holdings. But even if the programs succeed, the reduced import of gold will not affect the price of gold significantly, since it is not driven by physical demand, but by investment demand.

So far, the program is a failure. After one month, it has netted only one kilogram out of an estimated 20,000 tons of privately-held gold. It should not be surprising, given the fact that the schemes assumes that people will give up all their gold and might get both interest payments and principal paid in rupees, a currency which has historically been often significantly devalued.

The bottom line is that the Indian government launched three gold schemes. After one month, they are a failure, so they are unlikely to affect the gold market significantly, at least unless they encourage Indian investors to shift from gold-backed ETFs.

If you enjoyed the above analysis, we invite you to check out our other services dedicated to the precious metals investors. We invite you to join our gold newsletter today – you’ll also gain 7-day trial of our premium Gold& Silver Trading Alerts. It’s free and if you don’t like it, you can easily unsubscribe.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor