Recently, Indian govt announced a particular scheme in their budget 2015 notes which took a lot of attention, especially gold merchants and speculators. With gold prices tumbling since last couple of years, the new scheme-if it works, would not only increase the supply of precious metal at domestic level, in-turn cuts our international gold imports which further depresses the price at global scale.
What is gold monetization scheme?
The gold monetisation scheme is designed to help you make returns from your idle gold or jewellery without having to sell it. If you deposit your old gold with the bank under this scheme, you can earn an interest, calculated on the value of gold. The other benefit is that the gold will be in safe keeping without your having to cough up locker charges. Older gold deposit schemes in existence offered 1 per cent interest for three/four-year deposits. But sources say that the new scheme will carry a higher interest to encourage people to come forward to monetise their gold. The Government intends to on-lend this gold to jewellers and reduce the country’s import bill.
The jewellery you deposit will be melted and assayed. Therefore, at the end of the deposit term, you will get back only gold bars and not your original piece of jewellery.
What are means and consequences?
As we already know the gold prices are tumbling in larger timeframes since last couple of years. This scheme if it works would increase the supply at domestic levels. Indian investors with excess exposure on the precious metal will use the new scheme to secure the interest rate to offset the fall in price. More gold will be offered in large scale to banks, which in turn increases the supply in domestic level.
More gold supply at domestic scale offsets the need for importing from abroad .This causes a cut in import bill and further depresses the gold price in global scales. why global scale? India is the largest importer of gold in international level,which makes sense for further fall.
We can expect the gold prices to fall further in long term, even if the short term movements become choppy or rebound