India’s Government Wants People To Hold Paper, Not Gold
[The following post is by TDV Lead Researcher, Justin O'Connell]
India is looking to issue sovereign bonds linked to the bullion price so as to decrease the estimated 300 tonnes of annual demand for gold bars and coins, thus reducing bullion imports and decreasing the trade deficit. The Reserve Bank of India (RBI) will issue the bonds for the government at a minimum interest rate of 2%. “The main idea is to reduce the demand for physical gold,” a proposal draft by RBI stated.
This represents an attempt to call in the country's roughly 200,000 tonnes of gold held by households at a time when nations close to India, such as China, are looking into gold as a keystone part of monetary policy. India has been buying gold and silver in record demand, and it is likely in the interest of the government to undermine this so as to manage trade deficits and acquire gold for itself. Acting as a custodian for the nation's gold increases the RBI's management capabilities of India's economy.
India consumes approximately 1,000 tonnes of gold each year, most of which is imported, and gold is the second-biggest expense on its import bill besides oil. Finance Minister Arun Jaitley has plans in February for a sovereign gold bond and a bullion deposit scheme. The deposit scheme is aimed to push households to sell the 200,000 estimated tonnes of gold they hold in exchange for the bonds, thus allowing individuals to invest in “paper” gold, not physical gold. “An indicative lower limit of 2 percent may be given but the actual rate will have to be market-determined”, the proposal said.
The bonds are proposed as being issued in denominations of two, five and 10 grams of gold, and possibly other sizes for a short-term of five to seven years. They will be available to be used as collateral for loans.
“The provision of a 2 percent interest rate and use of bonds as collateral are among the things that should attract investors,” said Prithviraj Kothari, vice-president of India Bullion & Jewellers' Association. However, many Indians likely will not use this program, as there is a major difference between physical and paper gold. Exchange-traded funds have not been very successful in the country.
The government wants to issue bonds approximating 135 billion rupees ($2.12 billion) or the equivalent of 50 tonnes of gold. The government plans to market the bond via post offices and various brokers and agents. The bonds will not offer tax breaks over physical bullion, leading Indian's to likely stick with buying gold coins and bars in cash to potentially limit tax liability. Comment is open to the public until July 2. As SRS Rocco reports, India is on track currently to break silver import records. India imported a record 7,063 metric tons of silver in 2014, an increase of 15% over 2013. Silver imports are also up in 2015. As ETF Securities reports in their Precious Metals Monthly Report for May 2015:
The latest data through April show India silver imports running about 30% above the 2014 record pace, on track for about 300 mn ounces of imports in 2015. India imports alone are on pace to consume about 1/3 of total global silver supply available in 2015.
Indian silver demand could reach 9,000 metric tons of silver in 2015 or one-third of global silver mine supply compared the 25% of demand India accounted for in 2014. Silver prices have remained steady in the $16 range for several months, rangebound alongside a gold that has not slipped below $1,150 for several weeks. Interest has spiked at the retail level in the US, as can be reflected in the amount of gold and silver bullion coins the US Mint has sold in recent weeks.
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Justin O'Connell is Lead Researcher at Dollar Vigilante and Chief Executive Officer of GoldSilverBitcoin. Justin is also a co-host at Ovoss.fm, a lifestyle podcast about music, news, life and other topics. He lives in San Diego, California. You can follow him on Twitter, Facebook, Instagram and Medium.
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