Bring gold to the fore | Business Line

A pause for now | Business Line

Please read my letter "Bring gold to the fore". My earlier article "Gold management needs a makeover" , a slightly edited version of which was published in Business Line in April 2012 is copied below:

M G Warrier

Gold Management needs a makeover

M G Warrier

In the recent weeks, whether in the context of doubling of customs duty in the Budget proposals, 2012-13 or the concern expressed by RBI about the rise in growth in import of gold and other precious metals, the analysts and experts on one side and business interests on the other have kicked off a debate on gold management. All stakeholders agree on the need to prudently manage gold and its price in the market.

It would be worthwhile here to remember the views expressed by World Gold Council (WGC) way back in March 2011. The WGC stated that India’s role as a key driver of global gold demand is reaffirmed by the research and observed asunder:

• At more than 18,000 tonnes, Indian households hold the largest stock of gold in the world.

• Gold purchases in India accounted for 32% of the global total in 2010

• The CMIE forecasts that India’s annual real GDP will grow at over 10% from 2010-15, before slowing to an average rate of around 8.4% until 2020

• The vast majority of the Indian population (70%) lives in villages, which have traditionally formed the source of more than two thirds of Indian gold demand

• This sector has been growing at less than 1% per annum but is projected by CMIE to grow in future at over 5% per annum, further fuelling gold demand.

 The World Gold Council research shows that by 2020 cumulative annual demand for gold in India will increase from the present level of 1000 tonnes to excess of 1200 tonnes or approximately Rs. 2.5 trillion, at 2011 price levels. Policy makers will have to think beyond the arithmetic of demand and supply of gold, as gold has a significant role in the economic development of the country. This role gets factored into Forex Reserves Management, assets of financial institutions, gold owned in the form of jewellery, bullions, gold bars or coins by institutions and individuals and so on. The quantity of gold with religious institutions and households in India has never been assessed.

According to one estimate, of the world’s exploited stock of 140,000 tonnes of gold, WGC has estimated holdings of gold by Indian households at more than 18,000 tonnes. About 600 tonnes are held with RBI and an unestimated quantity is hels by temples and religious institutions. On the part of GOI/RBI, it was a late decision in the last quarter of 2009 to increase the gold component in the country’s forex reserves by about 200 tonnes (valued at over Rs 30,000 crore) by a purchase from the International Monetary Fund.

While overall stock position and central bank’s holding of gold are not that impressive, our country imports around 800 tonnes of gold annually which is not a small quantity by any standard. When it comes to deployment of this precious metal to the advantage of the nation, the story is really pathetic.

Gold should be restored its status as store of value by making it tradable, secure and available in ‘paper’ form against actual stocks of pure and standard gold. Move towards this objective is necessary from the forex angle and from the common man’s perception of the metal as a liquid asset and pride possession.

At the national level, it is high time, gold is accorded the position it deserves in the forex reserves management. Centre could also consider an arrangement, through RBI or any other duly constituted authority, to trade in ‘paper gold’ against genuine tradable gold stocks. Mutual Fund ETFs are no substitute for this.

In India gold is popular for all wrong reasons. The fascination this yellow metal attracts in its ornament and dowry forms has brought about an aversion among the people in the country even to talk about gold in public.

From the retail investors’ point of view, unfortunately, Gold Exchange Traded Funds(ETFs) of  Mutual Funds are yet to become popular and really tradable and therefore common man is tempted to invest in ornament gold which has several negatives such as difficulty in ensuring purity, making charges and other invisible costs, security related issues and inadequate liquidity.

The legendary money-lender who is very much present today in a variety of attires take advantage of the helplessness of the common man by luring him with loans against jewellery at high rates of interest and till recently offered unimaginably high amount of loan against each 10gram of gold with the ultimate motive of robbing the owner (the pledged gold is sold or forfeited by the money-lender as the loan plus interest grows much beyond the real value of gold pledged in less than a year). This trend, hopefully, has been reversed with the recent RBI directive to follow prudential norms in regard to Loan to Value ratio.

Time is opportune for authorities to think in terms of dedicated professional institutions at regional/state level which will handle gold from a banking angle with an apex body equipped with linkages for import and export of gold and gold products with borrowing and lending capabilities. States like Kerala have successfully intervened in other similar sectors like chits/kuris and lotteries, which were also areas of exploitation by vested interests, whereby players in private sector had to fall in line and function with discipline and self-regulation.

Establishment of ‘Gold Corporations’ with state participation could also be debated. Such an institution can act as a depository where the pride gold possession of individuals now in bank lockers and the pledged gold can find a safe shelter, provided the purity could be ensured and the ‘Corporation’ is able to find resources and skill to deal in gold and money with the customers’ confidence.

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