Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Underlying reasons for gold rush - Outside View by S.S. TARAPORE
Underlying reasons for gold rush

Gold demand cannot be curbed through bans and controls. Rather, inflation, which is driving the demand for the metal, should be reined in.

The Reserve Bank of India's (RBI) Draft Report of the Working Group on Gold, released on January 2, 2013, will be a watershed in the formulation and implementation of India's policy on gold. The Group has provided yeoman service by suggestions to help policy formulation. The Report is a lexicon on gold and will be a reference point for policy.

Macro Perspective

A balance of payments current account deficit (CAD) of 2.5-3.0 per cent of GDP has been considered as manageable, but in recent years it has risen to 4.2-4.5 per cent of GDP, which is of concern.

The anti-gold lobby which has an influence on the political economy set-up argues that as gold imports account for 10 per cent of the total, if only there were no gold imports the problem of the large CAD would disappear! To the credit of the Group it emphasises that providing an adequate rate of return on alternative instruments holds the key to reducing the excessive demand for gold imports. While the Group does not recommend sledgehammer measures, parts of the Report could be interpreted as recommending such measures.

The Group would do well to emphasise that the CAD is nothing other than the gap between savings and investments, and the answer to the large CAD is to reduce the gap between savings and investments. Again, it is time policymakers gave up attributing generalised inflation, as prevalent in India today, to food, oil and gold. The correction of the large CAD requires a reduction in inflation, which in turn, requires a reduction in the gross fiscal deficit.

Import Duty on Gold

The Group stresses that there are limits to raising import duties on gold. At the same time the Group says "If considered appropriate, further hikes in import duties may have to be contemplated to dissuade gold imports" (Paragraph 13.2 of the Report). The Group should ensure that it is not made accountable for the rise in illicit imports.

While higher import duties on gold would strictly not be treated as a multiple currency practice, it is so in spirit. Gold is a commodity but also a medium of exchange and a part of the country's foreign exchange reserves. Free movement of gold across the exchanges is the core of convertibility of the rupee and it would be best if the Group unequivocally refrains from endorsing increased import duties on gold.

The Group recognises that choking supply channels is not an appropriate way to reduce demand. Yet, the Report also states that setting limits on imports by canalising agencies and banks can reduce the demand for gold (Paragraph 13.6).

The Group would do well to avoid ambivalent views.

A Bullion Corporation

The Group sees merit in the idea of setting up a Bullion Corporation (or a Gold Bank) to mobilise idle gold and as a backstop facility to provide refinance to institutions lending against the collateral of gold.

The Group details various operations which the Corporation can undertake. It is also suggested that the Corporation can be empowered to handle the RBI's gold reserves.

The deployment of the RBI's foreign exchange reserves is a core function of the RBI and should not be delegated to the Corporation. The Group rightly recommends that the Corporation should be empowered to import, export, trade, lend and borrow gold and deal in gold derivatives.

The Group suggests that the RBI should nurture the setting up of the Corporation and prepare a Concept Paper.

The value of the Group's Report would be greatly enhanced if it were to incorporate a short Concept Paper to give the Gold Corporation concrete shape.

Monetisation of Gold

The Group emphasises the monetisation of gold and instruments and that banks should provide easy liquidity to instruments such as Gold Accumulation Plans, Gold Linked Accounts, Gold Deposits and Gold Pension Products.

If Gold Exchange Traded Funds are allowed to lend a part of their gold, it would bring idle gold into the mainstream of the financial sector.

All this would reduce the demand for imported gold. The Group should reconsider its stance on restricting bank financing of bullion and restrictions on import of gold coins. If banks sell coins, they should also be allowed to buy back coins. It needs to be appreciated that the more idle gold is bought into the mainstream the lower would be the import demand.

The Group recommends introduction of new gold-backed financial instruments to unlock the value of idle gold and provide real rates of return which should be equal to or better than gold. This would reduce the demand for imports of gold.

The Group should finalise its Report by the end of January 2013. The Union Budget should give a clear go-ahead for the setting up of Gold Corporation and introduce a couple of schemes to wean investors from gold to financial products.

Immediately thereafter, the RBI should go into overdrive to start implementing a large number of measures.

Finally, it is important to clear the conceptual cobwebs which lead to the erroneous belief that controls and bans can curb the demand for gold.

Please Note: This article was first published in The Hindu Business Line on January 10, 2013.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


Equitymaster requests your view! Post a comment on "Underlying reasons for gold rush". Click here!


More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

Aug 8, 2017

'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

Bitcoin Continues Stellar Rise(Chart Of The Day)

Aug 10, 2017

Bitcoin hits an all-time high, is there more upside left?


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms