It doesn't make any sense to hand over your gold to the govt

Nov 6, 2015

- By Vivek Kaul

Vivek Kaul
The Prime Minister Narendra Modi launched the gold monetisation scheme as well as sovereign gold bonds, yesterday. The scheme and the bonds try to address India's obsession with gold and the macroeconomic fall out of that obsession.

While nobody really knows how much gold is owned by Indian households, various estimates keep popping up. The estimates that I have seen in the recent past put India's household gold hoard at 20,000-22,000 tonnes (Don't ask me how these estimates are arrived at. I have no idea).

In this column I will just concentrate on the gold monetisation scheme and leave the analysis of the sovereign gold bonds for Monday's column (November 9, 2015). I will also discuss the macroeconmic fall out of India's obsession with gold on Monday.

The idea behind the gold monetisation scheme is to put India's idle gold hoard to some use. Under this scheme, you can deposit gold with the bank and earn an interest on it. The Reserve Bank of India (RBI) issued a notification on November 3, 2015, which said that the banks would pay an interest of 2.25% if the gold is deposited for the medium term and 2.5%, if the gold is deposited for the long term. The medium term is a period of five to seven years whereas the long term is a period of 12 to 15 years. (For those interested in knowing the entire process of how to go about it, can click here).

Also, as the RBI notification issued on October 22, 2015, points out: "The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of Government of India."

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What this means is that individual banks are free to decide on the interest that they will offer on the gold they collect in the short-term for a period of one to three years.

So, the question is will this scheme succeed in getting India's hoard of gold out from homes and into the banks? The first thing we need to look at is the existing gold deposit scheme which was launched in 1999. The RBI notification issued in October 1999 states that "individual banks will be free to fix the interest ratesin tune with their costingconsiderations.Interest will be payable in cash at fixed intervals or at maturity as decided by the bank."

Under this scheme the State Bank of India allowed people to deposit gold for three, four or five years. The interest paid on gold was 0.75% for three years and 1% for four and five years, respectively. The minimum deposit had to be 500 hundred grams of gold.

The scheme did not manage to collect much gold. An article in The Financial Express points out: "The existing scheme, introduced 16 years ago, mobilised only 15 tonnes of gold-as the minimum deposit was 500 grams and the interest rate was a mere 0.75% for a three-year deposit." There was no upper limit to the amount of gold that could be deposited.

As I pointed out earlier in this column, estimates suggest that India has around 20,000 tonnes of gold. When compared to that fifteen tonnes is not even a drop in the ocean.

Further, October 22, 2015 RBI notification on the new gold monetisation scheme clearly states that: "The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme."

So the minimum amount of gold that can be deposited under the new scheme is just 30 grams in comparison to the earlier 500 grams. Over and above this, the gold can be deposited up to a period of 15 years in comparison to the earlier five. Further, the rate of interest on offer is either 2.25% or 2.5%, which is higher than the earlier 0.75-1%.

On all these counts the new gold monetisation scheme is a significant improvement on the gold deposit scheme. Given this, will gold move from Indian homes to banks (and indirectly to the government, given that banks are running a major part of the scheme on behalf of the government)?

Before answering this, it is worth asking here, why do Indians buy gold? It is a part of our tradition and culture is the simple answer. What does that basically mean? It means we buy gold because our ancestors used to buy gold as well. We also buy gold because it is easy to sell during times of emergency. We are emotionally attached to the gold we buy and like seeing it in the physical form. This makes it highly unlikely that the gold monetisation scheme will be a smashing success.

Any more reasons? Gold is a very easy way to hide black money (essentially money which has been earned and on which tax has not been paid). A lot of black money can be stored by buying just a few bars of gold. People who have invested their black money in gold are not going to come forward with it and deposit it in banks. That is really a no-brainer.

Further, the customer agreeing to deposit the gold the bank will "have to fill-up a Bank/KYC form and give his consent for melting the gold." The gold will be melted in order to test its purity. Also, the "the gold ornament will then be cleaned of its dirt, studs, meena etc."

The question is how many women would like to see their gold jewellery melted so that they can earn a return of a little more than 2% per year on it? I don't think I need to answer that question.

These reasons best explain why the gold deposit scheme launched in 1999 has been a huge failure. And they also explain why the current gold monetisation scheme is unlikely to lead to any major shift of gold from homes to the government.

This brings me to the question whether you should be depositing your gold with the banks (and essentially the government)? One reason why people buy gold is because they believe that it acts as a hedge against inflation. The evidence on whether gold acts as a hedge against inflation is not so straightforward.

As John Plenary writes in Capitalism-Money, Morals and Markets: "In real terms, the price of gold in 2012 was similar to the prevailing price in 1265." So doesn't that mean that gold has acted as a store of value over the last 1000 years? Not really. As Plenary writes: "Over much of that time, though, the yellow metal failed to live up to its reputation as a solid store of value."

Why does Plenary say that? Dylan Grice, who used to work for Societe Generale explains this. As Grice writes: "A fifteenth-century gold bug who'd stored all his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90 per cent over the next 500 years."

In fact, even those who had bought gold at the peak of the 1971-1981 bull market in gold would have lost around 80% of their investment in real terms, over the next two decades.

Nevertheless, if you believe that gold acts as a hedge against inflation, should you hand over your gold to the government? Inflation more often than not is due to the "easy money" policies run by the government. This could mean inflation created through money printing or keeping interest rates too low for too long.

When gold and silver were money, the governments destroyed money by debasing it, i.e., lowering the content of precious met-als in the coins they issued. When paper money replaced precious metals as money, the governments destroyed it by simply printing more and more of it. Now they create money digitally.

So the last thing you should do is hand over gold to the government. The reason you are holding gold is because you don't trust the government to do a good job of managing the value of money. And given that, it's best that the hedge (i.e. gold) be with you. If that means losing out on interest of 2.25-2.5% per year, then so be it.

Postscript: On Monday (Nov 9, 2015) I will be analysing the sovereign gold bonds which have been launched as well. Look out for that.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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8 Responses to "It doesn't make any sense to hand over your gold to the govt"


Nov 10, 2015

The Real reason the gold scheme will fail

a) Gold in the form of Coins, TT bars and bricks are mostly with people who have turned their black money to gold. They will not hand over this to the Government.

b) Gold in the form of Jewellery is usually made up of 22 Carat Gold. As this improves the malleability. These Jewellery are usually are 20 % more expensive than 24 Carat gold of the same weight, but will loose 30 to 50 % of the value, when they are melted down and purified. The reduction is on account of wastage, impurities and removal of extras like gems. That will be the value given by the Government to the owner. Which does not make sense and two, no one will want to melt down finely crafted Jewellery to get 50 % value and then 2.5 % interest per annum on the reduced value.

c) Most of the Gold is with Religious institutions. Will they part with their Gold. Very unlikely. Too many vested interests and too many sensitivity (read vote bank) issues.

This scheme will be a huge flop.




Bhalchandra Gajare

Nov 10, 2015

Good article, I agree with vivek. We hold physical gold as it is real money and rest all (currencies, stocks, bonds, paper assets ) are derivatives of GOLD. We can trust physical gold but not paper or demat form of gold. We have seen what happened to e - gold & e - silver.



Nov 7, 2015

A more simplistic critique/explanation would be - through the gold monetisation scheme, a physical asset (gold) is reduced to a paper asset which gets eaten up by termites (read, inflation) over a period of time, thereby creating a big hole in the paper you hold. And, when retail inflation is running at more than 10 % p.a., the interest you get on the GMS is a mere 2.25% p.a. Thus, it is a double loss -- you neither get appreciation on your deposit of gold nor earn the rate of interest on bank savings deposit. Notwithstanding that, for a conservative person/family, it will make more sense to encash the gold & invest it in, say, NSC with Post Office which doubles your capital in 8 years and, on maturity buy-back more gold from the market, if the need arises. All said & done, it makes no economic sense to part with gold, besides the sentimental value it holds for the Indian women.



Nov 6, 2015

It is a poorly written article. 80% of the article space does not even talk about article title "It doesn't make any sense to hand over your gold to the govt".

Only in last para the reasoning is given for not handing over gold to govt which is like - since govt. can't manage money & govt.causes inflation so you should keep the gold with yourself even if it means losing some interest income.

That is a fallacious argument. If Govt. is paying the money for safekeeping your gold, you should avail it. Unless you are pessimistic enough to think that govt. will go bankrupt. If that is the case then you should pack the bags, sell all the gold and migrate to Greece.

ps. the gold scheme may not be successful for other reasons like black money and jewellery


veeramani vishwanathan

Nov 6, 2015

Dear Sir,

Thank you for the beautiful write up. I actually saw from you list that TN is the major Hallmark centres 57 and then is Kerala at 39 and then Maharastra.

As you said, I think as you said most of the people put in gold to hide their black money. If you can couunt the number of hotels and sweet shops, TN is the major in this as you can see one resaurant/sweet have about 24-50 shops in Coimbatore with same names. The same goes to schools, colleges and political parties. There is about 25 parties or more in TN for voting. I do not think that any other state has some many same restaurants, sweet shops, schools, colleges with same names. Also no other state has so many parties for election.

All this need to be checked out and flushed from the markets.

With best regards,



RS Rathore

Nov 6, 2015

Vivek, I fully agree to what you have elaborately explained in your article "It doesn't make any sense to hand over your gold to the govt". Affirming to your article, I too would say that the practicability of 2.5% interest rate on gold deposition scheme is hardly feasible and is definitely going to fail.


M P Gadia

Nov 6, 2015

Though I am not an expert, I have notice certain wrong thing in your article some of which are noted below:
1. The interest rate has been increased 3 fold but you are saying - "So be it ". Whether you expect Govt. to pay at FD rate.
2. You have quoted - "Further, the customer agreeing to deposit the gold the bank will "have to fill-up a Bank/KYC form and give his consent for melting the gold." The gold will be melted in order to test its purity. Also, the "the gold ornament will then be cleaned of its dirt, studs, meena etc.". All are submitting KYC at all the places now and there is no problem.
3. You have mentioned -"Inflation more often than not is due to the "easy money" policies run by the government. This could mean inflation created through money printing or keeping interest rates too low for too long. You must be aware that in all the advance countries lie Japan, USA . the rates are low and there is very low inflation there by keeping interest rate low. off course, the printing of notes is the main reason f inflation f the equivalent GDP growth is not there.
4. You have quoted -" In real terms, the price of gold in 2012 was similar to the prevailing price in 1265.".Whether you have checked it. Every body know what was the price of GOLD 40 years back and what is now.
It looks like that you do not like the scheme and want to derail the Government scheme and that without giving satisfactory reasons which can be digested. Interest of 2.5% for dead assets is not bad as you have tried us to understand.
Please give satisfactory reasons to agree to your suggestion.


Subhashish Dhar

Nov 6, 2015

I'm not sure if I understand it fully when you say "if you believe that gold acts as a hedge against inflation, should you hand over your gold to the government?"

If I deposit, say 30g of gold with the bank for 15 years, Am I not getting back the 30g of gold(or its equivalent price) after 15 years?
So, how is it different if I keep it in my safe or deposit it with the bank?
Is there some tax associated?


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