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Significant move by GOI on Gold
by rawemotions Sun Mar 01, 2015 11:53 am
The federal budget of financial year 2015-16 has signalled a significant change in Indian government's strategy on Gold. If you analyze the Gold monetization scheme, effectively
a) Indian Government is planning to increase its official gold holdings by 200% from 557.7 to 1800 Tonnes, matching Chinese holdings. All the Gold is going to be bought internally from Indian people. So Gold moves from people to the Banks.
b) Part of this gold will constitute CRR, This is extremely significant, it means portion of bank's CRR will now be in Gold. It is almost a backdoor way of re-introducing gold standard, but partially. It also means money locked up on CRR, can now be released for loan disbursements etc.., effectively a sort of stimulus for an amount totaling
49 Billion dollars in money supply.
c) GOI is proposing to give interest on Gold Bonds. This is a win-win for people, since those who hold gold are not earning interest today and the hedge against inflation capacity remains in the Gold Bond, since they can be redeemed at whatever is the price of the gold at the time of redemption. So we should see enthusiastic response from the people for this scheme, if they can get over their fears of handing over their gold.
d) Banks win, because, not only can they release 49 Billion dollars of additional money and still maintain CRR, the amount of interest they will get on loans for this money will be as high as 10-12%, but the amount of interest they would pay on the gold loans is likely to be much smaller, probably even less than savings banks interest. So the interest spread for Banks goes up, so their profits would also go up. Essentially for Banks, it is almost equivalent to a reduction in CRR, It is a legal way to circumvent Base III norms.
I think Bank's stocks would zoom.
a) Indian Government is planning to increase its official gold holdings by 200% from 557.7 to 1800 Tonnes, matching Chinese holdings. All the Gold is going to be bought internally from Indian people. So Gold moves from people to the Banks.
b) Part of this gold will constitute CRR, This is extremely significant, it means portion of bank's CRR will now be in Gold. It is almost a backdoor way of re-introducing gold standard, but partially. It also means money locked up on CRR, can now be released for loan disbursements etc.., effectively a sort of stimulus for an amount totaling
49 Billion dollars in money supply.
c) GOI is proposing to give interest on Gold Bonds. This is a win-win for people, since those who hold gold are not earning interest today and the hedge against inflation capacity remains in the Gold Bond, since they can be redeemed at whatever is the price of the gold at the time of redemption. So we should see enthusiastic response from the people for this scheme, if they can get over their fears of handing over their gold.
d) Banks win, because, not only can they release 49 Billion dollars of additional money and still maintain CRR, the amount of interest they will get on loans for this money will be as high as 10-12%, but the amount of interest they would pay on the gold loans is likely to be much smaller, probably even less than savings banks interest. So the interest spread for Banks goes up, so their profits would also go up. Essentially for Banks, it is almost equivalent to a reduction in CRR, It is a legal way to circumvent Base III norms.
I think Bank's stocks would zoom.
rawemotions- Posts : 1690
Join date : 2011-05-03
Re: Significant move by GOI on Gold
by Marathadi-Saamiyaar Sun Mar 01, 2015 1:22 pm
I am not sure how successful this program will be.
1. Will the money redeemed fetch the same quantum of gold ? (now convince the commoner - the poor people)
2. In middle class families that don't have an urgent need for money, it is also the sentimental value of the ornaments. On "loaning" the gold to the bank these specific ornaments are lost forever for the families (it is not like locker).
3. While Banks will take in the gold and issue the bonds on showing a simple Aadhar or PAN card, redeeming these bonds will involve a string of bureaucratic hurdles - that too if the person to whom the bond was issued dies.
(Have you transferred stocks in the name of a deceased?) Easy to buy stocks and bonds - but very frustrating and time consuming in transferring or redeeming.
It will show a small spike in collections but have to wait and watch for the ultimate success.
1. Will the money redeemed fetch the same quantum of gold ? (now convince the commoner - the poor people)
2. In middle class families that don't have an urgent need for money, it is also the sentimental value of the ornaments. On "loaning" the gold to the bank these specific ornaments are lost forever for the families (it is not like locker).
3. While Banks will take in the gold and issue the bonds on showing a simple Aadhar or PAN card, redeeming these bonds will involve a string of bureaucratic hurdles - that too if the person to whom the bond was issued dies.
(Have you transferred stocks in the name of a deceased?) Easy to buy stocks and bonds - but very frustrating and time consuming in transferring or redeeming.
It will show a small spike in collections but have to wait and watch for the ultimate success.
Marathadi-Saamiyaar- Posts : 17675
Join date : 2011-04-30
Age : 110
Re: Significant move by GOI on Gold
by rawemotions Sun Mar 01, 2015 1:48 pm
Your third point is important. But I am not sure I understand your first point.Marathadi-Saamiyaar wrote:I am not sure how successful this program will be.
1. Will the money redeemed fetch the same quantum of gold ? (now convince the commoner - the poor people)
2. In middle class families that don't have an urgent need for money, it is also the sentimental value of the ornaments. On "loaning" the gold to the bank these specific ornaments are lost forever for the families (it is not like locker).
3. While Banks will take in the gold and issue the bonds on showing a simple Aadhar or PAN card, redeeming these bonds will involve a string of bureaucratic hurdles - that too if the person to whom the bond was issued dies.
(Have you transferred stocks in the name of a deceased?) Easy to buy stocks and bonds - but very frustrating and time consuming in transferring or redeeming.
It will show a small spike in collections but have to wait and watch for the ultimate success.
When you redeem the Gold Bond (Or Coin With Ashok Chakra - this part is not clear) you do not redeem based on money. You get back Gold, exactly the same amount you pledged.
On your second point, it hinges on your third point. Redemption has to be made easy/time bound for the success of the scheme.
What is not clear though is method they would use to value jewels. There is some extra values in jewels. Some of them have golds and stones. Some of them have extra price for the craftsman ship. The GOI cannot be a pawn broker (they cannot take the jewels and keep it safe), and very few actually hold Gold bars, which are the kind of folks who would be interested in this. I do not see it succeeding in a major way (going beyond the targeted tonnage), until the jewellery question is answered.
However the total Gross amount is still only 5%-6% of the available reserves distributed among people. So may be it could still succeed partially.
rawemotions- Posts : 1690
Join date : 2011-05-03
Re: Significant move by GOI on Gold
by Marathadi-Saamiyaar Sun Mar 01, 2015 2:03 pm
rawemotions wrote:Your third point is important. But I am not sure I understand your first point.Marathadi-Saamiyaar wrote:I am not sure how successful this program will be.
1. Will the money redeemed fetch the same quantum of gold ? (now convince the commoner - the poor people)
2. In middle class families that don't have an urgent need for money, it is also the sentimental value of the ornaments. On "loaning" the gold to the bank these specific ornaments are lost forever for the families (it is not like locker).
3. While Banks will take in the gold and issue the bonds on showing a simple Aadhar or PAN card, redeeming these bonds will involve a string of bureaucratic hurdles - that too if the person to whom the bond was issued dies.
(Have you transferred stocks in the name of a deceased?) Easy to buy stocks and bonds - but very frustrating and time consuming in transferring or redeeming.
It will show a small spike in collections but have to wait and watch for the ultimate success.
When you redeem the Gold Bond (Or Coin With Ashok Chakra - this part is not clear) you do not redeem based on money. You get back Gold, exactly the same amount you pledged.
On your second point, it hinges on your third point. Redemption has to be made easy/time bound for the success of the scheme.
What is not clear though is method they would use to value jewels. There is some extra values in jewels. Some of them have golds and stones. Some of them have extra price for the craftsman ship. The GOI cannot be a pawn broker (they cannot take the jewels and keep it safe), and very few actually hold Gold bars, which are the kind of folks who would be interested in this. I do not see it succeeding in a major way (going beyond the targeted tonnage), until the jewellery question is answered.
However the total Gross amount is still only 5%-6% of the available reserves distributed among people. So may be it could still succeed partially.
on point one, explain and convince the uneducated commoner (degrees dont make a person educated) to part with the family gold.
Indians will part with his Gold only if he cannot even eat grass for food (greens - the cheapest "vegetable" one can buy). It has family, personal, and emotional value which cannot be valued.
Marathadi-Saamiyaar- Posts : 17675
Join date : 2011-04-30
Age : 110
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