The government is planning to launch a new gold deposit scheme, which will not only curb the demand for physical gold but also satisfy the needs of investors who prefer gold as a natural hedge against unforeseen circumstances.
The Reserve Bank of India is studying the proposal, which will have a significant impact on the country's monetary policy. It also held a meeting with leading banks, commodity exchanges and bullion associations a week ago to seek their views on the scheme.
Investors in the scheme will be given certificates, indicating the ownership of the amount of physical gold they have paid for. These certificates will be tradable on the commodity exchanges.
Therefore, investors can buy and sell the commodity without incurring the associated transaction and storage costs.
On the flip side, the physical stock of gold backing the certificates will be in the custody of banks. Banks will hedge the commodity on the exchanges so that they do not suffer a loss when an investor comes to redeem his certificate. At the same time, with banks holding the gold stocks, these will add to the official gold reserves of the country.
Sources involved in the deliberations said the RBI started working on the scheme after the government freed the import of gold. However, the central bank soon realised that it might not be able to keep a tab on the quantity of gold imported and their end use.
Thus, one of the proposals that came up involved the physical asset being kept with banks, while individuals got paper certificates showing the ownership of the share.
Discussions with market participants also revealed that a "paper gold" scheme would be a success with investors.
Compared with the existing gold schemes offered by banks, which involve melting and refining of household gold ornaments and their conversion into gold bars, the current one does not involve any conversion and, therefore, the losses are minimal.
Banks have commended the new scheme saying they will have less reservations about marketing such a scheme since it mitigates the operational risk.
"The investor will have greater flexibility in choosing the maturity term and banks can use their ATMs and Internet kiosks to the benefit of the investor," a banker involved with the issue said. "Banks have a large retail network and are more adept in dealing in paper products than physical ones," he added.
The new proposal
- Investors in the scheme will be given certificates, indicating the ownership of the amount of physical gold they have paid for
- These certificates will be tradable on the commodity exchanges
- The physical stock of gold backing the certificates will be in the custody of banks
- Banks will hedge the commodity so that they do not suffer a loss when an investor comes to redeem his certificate
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