Gold monetization

1. GOLD
MONETIZATION
(Gold Monetization Scheme, 2015)
Shubham Kumar Meena
ShubhamKumarMeena7@gmail.com
+91-9828976273
Section-K (Tute Group: K53)

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Tableof contents
What's Gold Monetization?......................................................................................2
Background ..............................................................................................................2
Gold Monetization Scheme (GMS), 2015 By Governmentof India..........................2
Who all are eligible? ................................................................................................3
Objectives Of the scheme.........................................................................................3
Key notes from the scheme......................................................................................4
Benefits of the Gold Monetization Scheme..............................................................5
A Snapshotof the Indian Gold MarketAmid Covid-19.............................................6
Gold: The Collateral of Last Resort...........................................................................6

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What'sGoldMonetization?
Monetization refers to a process of converting a commodity into domestic currency–
rupee. Gold Monetization refers to unlocking the value of gold in terms of rupee.
Background
The basic idea behind the scheme is to mobilize the gold lying idle and put it to
productive use. India is one of the largest consumers of gold in the world; however, it
has to rely on imports to meet around 80 per cent of its demand for gold. Gold accounts
for a preponderant share in the country’s trade balance. Gold imports contributed to
nearly 30 per cent of trade deficit during 2009-10 to 2011-12. In this context, an idea
that has gained currency is to monetize the gold which is lying idle with the households
and other entities within India and make it available for re-use.
GoldMonetizationScheme(GMS),2015ByGovernmentof
India
The Gold Monetization Scheme (GMS) was announced in the Union Budget Speech of
2015-16. Though GMS was announced in the Budget to replace the hitherto existing
Gold Deposit Scheme (GDS) (1999) and Gold Metal Loan (GML) Scheme (1998) as it is
a combination of the best features of both the schemes.
Gold Monetization Scheme (GMS) refers to a process wherein a depositor deposits gold
(say jewellery, coin, etc.) with a bank which is then lent by the bank to its borrowers (say
jewellery makers), after melting into gold bars. This is akin to a normal banking
operation (like a savings bank account), but carried out in terms of gold instead of in
rupee.
GMS allows the depositors of gold to earn tax free market determined interest income
(denominated in gold but recoverable either in gold or in rupee [mandatorily in rupee if it
is deposited for a medium or long term]) from the pure gold they deposit with banks in
their “Gold Savings Accounts” and permits the jewelers to obtain their raw material -gold
bars created from the melting of the gold deposited with the banks- as loans in their
“Metal account”. In addition, Banks / other dealers would also be able to monetize their
gold.
Gold can be submitted in any form (bullion, jewellery etc.) but the amount deposited
with the bank is calculated on the basis of the pure gold content of that deposit (after
removing the weights of precious stones in jewellery etc.), which is verified through an
accredited assayer. Both principal and interest to be paid to the depositors of gold, will
be ‘valued’ in gold.

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For example, if a customer deposits 100 gms of gold and gets 1 per cent interest, then,
on maturity he has a credit of 101 gms. The customer will have the option of redemption
either in cash or in gold, which will have to be exercised in the beginning itself (at the
time of making the deposit).
Whoallareeligible?
Only Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange
Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can
make deposits under the scheme, either individually or jointly. While 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. All Scheduled Commercial Banks (excluding RRBs) can
accept these deposits.
ObjectivesOfthescheme
1. To mobilize the gold held by households, trusts and various institutions in India
and put it into productive use.
2. To provide a fillip to the gems and jewellery sector in the country by making gold
available as raw material on loan from the banks.
3. To be able to reduce reliance on import of gold over time to meet the domestic
demand, as India is one of the largest consumers of gold with virtually no
domestic production. (India imports as much as 800-1000 tonnes of gold each
year. Though stocks of gold in India are estimated to be over 20,000 tonnes,
most of this gold is neither traded, nor monetized.)
4. To make the existing schemes for mobilizing Gold (Gold Deposit Scheme and
Gold Metal Loan Scheme) more effective and to broaden their ambit from merely
mobilizing gold, to putting this gold into a broad range of productive uses
including strengthening the reserve requirements of the Central Bank.

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Keynotesfromthescheme
1. Minimum quantity: The minimum quantity of gold that a person can bring is
proposed to be set at 30 grains (corrected up to three decimals). Gold can be in
any form (bullion or jewellery) and of any purity standards.
2. Account: A Gold Savings Account will be opened by depositors at any time with
Scheduled Commercial Banks, after subjecting themselves to the Know Your
Client (KYC) norms, as applicable. This account would be denominated in grams
of gold.
3. Tenure of Deposits: The deposits under the revamped scheme can be made for
a short-term period of 1-3 years (with a roll out in multiples of one year); a
medium-term period of 5-7 years and a long-term period, of 12-15 years (as
decided from time to time). While the short-term deposits will be accepted by
banks on their own account, the latter will be on behalf of Government of India.
4. Interest rate: The amount of interest rate payable for deposits made for the short-
term period would be decided by banks on basis of prevailing international lease
rates, other costs, market conditions etc. and will be denominated in grams of
gold. For the medium and long-term deposits, the rate of interest (and fees to be
paid to the bank for their services) will be decided by the government, in
consultation with the RBI from time to time.
5. Redemption: For short-term deposits, the depositor will have the option of
redemption, for the principal deposit and interest earned, either in cash (in
equivalent rupees of the weight of deposited gold at the prices prevailing at the
time of redemption) or in gold (of the same weight of gold as deposited), which
will have to be exercised at the time of making the deposit.
For medium and long-term deposits, the redemption of principal at maturity
would, at the option of the depositor, be either in Indian Rupee equivalent of the
value of deposited gold at the time of redemption, or in gold. Where the
redemption of the deposit is in gold, an administrative charge at a rate of 0.2% of
the notional redemption amount in terms of INR will be collected from the
depositor.
6. SLR/CRR compliance: The short-term bank deposits will attract applicable cash
reserve ratio (CRR) and statutory liquidity ratio (SLR). However, the stock of gold
held by the banks will count towards the general SLR requirement.

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7. Utilization of Deposited Gold: The deposited gold will be utilized in the following
ways:
o Under short-term deposit, for:
 Coins
 Lending to jewellers

o Under medium and long-term deposit, for:
 Auctioning
 Replenishment of RBIs Gold Reserves
 Coins
 Lending to jewellers
8. Tax Exemption: Tax exemptions under the GMS include exemption of interest
earned on the gold deposited and exemption from capital gains made through
trading or at redemption.
BenefitsoftheGoldMonetizationScheme
1. The scheme will help in mobilizing the large amount of gold lying as an idle asset
with households, trusts and various institutions in India.
2. Benefit the Indian gems and jewellery sector which is a major contributor to
India's exports. In fiscal year 2014-15, gems and jewellery constituted 12 per
cent of India's total exports and the value of gold items alone was more than $13
billion (provisional figures).
3. The mobilized gold will also supplement RBI’s gold reserves.
4. It will help in reducing the Government’s cost of borrowing.
5. Over the course of time this is also expected to reduce the country's dependence
on the import of gold.

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ASnapshotoftheIndianGoldMarketAmidCovid-19
In the past six months we have seen low real interest rates in the United States, Europe and
Japan, lower economic growth projections, Brexit, the US-China trade war, and more. Covid-19
has brought everything to a standstill. Covid-19 has hit 115+ countries and everyday the
number of casualties are on the rise. As a result of the outbreak, equities, crude oil and currency
markets have collapsed.
Gold was the only asset class that held firm at the beginning. At the same time, portfolio
managers, institutional investors increased the weightage of gold in their portfolios.
After the coronavirus or COVID-19 became a global pandemic, investors are turning to gold
globally considering it the safest option to curb the economic distress.
Figure 1: Gold Prices in India In Past 6 months (Prices are continuously rising with the days of lockdown)
Gold:TheCollateralofLastResort
The weak global economic outlook for the entire year is might be the reason why gold prices are
surging. The yellow metal is considered as a financial instrument that does not erode in
valuation during periods of economic turbulence.
Gold provides liquidity with no credit risk, acts as an excellent diversifier and improves the
overall portfolio performance. It brings stability and generates higher risk-adjusted returns,
especially in times of uncertainty. We should see higher tactical allocations if the uncertainty

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and volatility continue. The current crisis is unprecedented and gold has a critical role in a
typical portfolio, depending upon one’s risk appetite, time horizon and return requirements.
Given the global and financial uncertainty, low interest rates and debasing currencies, gold is
expected to have a good run in the coming few years.
Imports in March 2020 were a washout and sales stalled, while weddings got rescheduled due
to the lockdown. This is reflected in local discounts on gold prices. We anticipate this summer
season, starting with Gudi Padwa and Akshaya Tritiya, to be subdued. Things might ease late in
the September quarter and we may see a rebound during Diwali. However, recycling of gold
and loans against gold jewellery will jump significantly once the markets open. This will be a
good time to allow banks to buy back gold and will be a great start to the Gold
Monetization Scheme too.
-----Thank You-----