There are many options open for investors to make gold-related investments. The government has come up with two new gold related schemes: the gold bond scheme and the gold monetization scheme. Both of them, without doubt, will help to funnel idle assets into more productive sectors of the economy. However, the uncertainty that prevails here is which one will be favored by the investors. Let's note down what each one has to offer.
The gold bond scheme
This is basically Gold in paper form that pays you interest. These bonds will track gold prices and also include an interest component on top of that. Further, they will be denominated in grams of gold and will be available in various denominations starting from 5 grams. Those seeking to invest in gold may find this attractive. The investment cap here is set at 500 grams per person per annum. It offers the following -
Easy exit - they can be traded on exchanges. Hence, liquidity will be available.
Interest rates over and above the capital gains on account of price rise.
Loans can be taken against bonds at a loan-to-value ratio permitted by RBI.
Tax benefits for capital gains on these bonds are proposed to be announced by the government in the upcoming budget.
The gold monetization scheme
This was undertaken in a bid to reduce gold imports. Under the scheme, idle gold lying with individuals can be deposited in banks and fetch interest on it. The government, however, will melt the gold and make it available for jewelers as raw material. This will significantly reduce India dependence on Gold imports. Some aspects of the scheme are -
The scheme is said to offer interest rate up to 2%, which will be set by banks.
Various tenure options, namely short, medium and long-term, will be offered.
The redemptions for short term can be either in the form of cash or gold. While that for medium and long terms are only in cash.
By considering the above points, the former scheme seems to be more attractive. As an article in Business Standard suggests, the gold bond scheme may work but the gold monetization scheme may not be as attractive. Such monetization schemes have not shown any success in the past. Plus households will not be happy to see their ornaments melted down for a relative small return. Lastly, the purity tests from recognized centers and collecting gold from remote places are other matters to be answered.
Although the immediate efficacy of the schemes remains in question, they surely do provide a long term framework for managing imports. Even if they don't take off immediately, their introduction is a sound policy.