Indians have old bonding with gold. Irrespective whether economy is doing good or bad, Indians buy gold. As per the estimates of World Gold Council and Thomson Reuters, India has about 22,000 tonnes of idle gold which is estimated to be valued at more than USD 1 trillion. Most of the household gold reserves are being held in the form of jewellery. Over past 5 years, India's average annual demand for gold has been 895 tonnes. Such a huge demand for gold has been creating problems in India's external economy. As India has little domestic production of gold, majority of the consumption is met through imports. High imports lead to higher Current Account Deficit (CAD). In 2013, Indian Government restricted gold imports in India to tackle the problem. However, now it has started producing undesirable results such as higher gold smuggling and black-marketing of gold. In response, the Government has tried to provide long term solution to the problem of huge demand for gold leading to heavy imports of the yellow metal.

The budget 2015-16 took steps to revitalising gold monetisation to put the idle gold to effective use and curb gold imports. In the wake of this, it is expected that, gold demand in India might be affected; weakening gold prices internationally even further.

Would gold monetisation in India work?

As laid down in the budget; the Government would encourage people to channelise their gold savings in gold deposit schemes that pay fixed interest. Apart from that, it intends to introduce sovereign gold bonds and would also look to release the Indian gold coin. These three moves are aimed at reducing dependency on gold imports. Whether gold monetisation would work in India depends of how attractive investors find the schemes.

Effects on gold prices

Considering huge idle stocks of gold in India, monetisation has a great potential to bring unutilised gold in the system. But to have any significant impact on gold demand and consequently on gold prices; gold monetisation should receive good response. So far, gold deposit schemes have got poor response from the investors for a number of reasons which include;
 

• Limited banks offered gold deposit schemes
• They were not marketed aggressively
• Assessment for determining purity of gold wasn't easy for banks
• Existing schemes suited temples more than individuals
   

The new gold deposit scheme should consider these negatives and should try to come up with better remedies. It also remains to be seen how much sovereign gold bonds offer to investors. As per the findings of a survey conducted by Federation of Indian Chambers of Commerce and Industry (FICCI), nowadays, gold consumers show willingness to give up the possession of gold if they are offered well-structured gold based investment products. Moreover, it is also observed that, investors seek standardisation in the physical market pertaining to quality and price. These attitudinal shifts may act as catalyst to gold monetisation programme.

PersonalFN is of the view that, the gold imports in India and ultimately gold demand of the world, may dip even if Government effectively monetises a fraction of idle gold. Having said this, there are many difficulties in doing so. The first and foremost is that gold jewellery accepted under gold deposit schemes would be melted first and while returning it to the depositor; it will be returned in the bar form. Investors may not be keen to utilise this option. In addition, investors subscribing to sovereign gold bonds may expect the Government to pay attractive rate of interest. Considering all aspects, PersonalFN believes, response to the gold monetisation schemes may be very limited in the near term; and gold prices are likely to be driven more by global events.

As per official records, non-farm unemployment rate in the U.S fell to 6 ½ year low in February. This has again given rise to a speculation that Federal Reserve (Fed), in the U.S. may hike interest rates sooner than expected earlier. As a result dollar rose sharply in the recent times. Strong dollar pushes gold prices lower. If interest rates in the U.S. start climbing, gold may take a further hit.

PersonalFN is of the view that, capitalising on gold price fluctuations is difficult even for savvy investors. Therefore, PersonalFN suggests that, you shouldn't indulge in any sort of speculation. Gold acts as a portfolio diversified and helps you hedging risk of inflation. Therefore, rather than judging the impact of gold monetisation in India on international gold prices; you would be better off if you avoid speculating on them. You may hold upto 10% to 15% of your assets in gold. Investing in gold Exchange Traded Funds (ETFs) is one of the most effective ways of buying gold.

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