Curbing the gold rush

S. Kalyanasundaram
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Gold and gold jewellery have excellent liquidity. — Nagara Gopal
Gold and gold jewellery have excellent liquidity. — Nagara Gopal

An increasing sum of money being invested by Indians in gold has led to higher gold imports. Investment in gold has always been considered as unproductive.

As commented by Warren Buffett, gold is dug out of the ground in Africa, or someplace and then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. Gold will never make any money in the real sense, will never pay a dividend and we spend money to store it.

However, dissuading people from investing in gold is not a simple matter. Our policy makers must appreciate why people invest money in gold.

Advantage, gold

Investing in gold confers many advantages on people. Gold and gold jewellery have excellent liquidity, it is similar to money in the bank or in the pocket, and buyers are always readily available. Gold jewellery can be used as security to borrow money.

Above all, investment in gold tackles inflation in an efficient way. Though investment in property also acts as hedge against inflation, the quantum of investment required for real-estate is huge and not flexible, whereas investment in gold can be done in small doses over a long period of time. And, Indians use gold jewellery at marriages and other functions.

Jewellery shops offer monthly savings schemes for buying jewels at the end of the scheme with bonus.

The RBI has reduced the quantum of loan offered by NBFCs against gold jewels by stipulating a minimum margin of 40 per cent.

It has advised banks that they should not lend for purchase of gold jewels The Finance Ministry has sounded out the RBI and commercial banks on the possibility of introducing a gold accumulation plan. This will mobilise the savings of people and invest in gold futures.

Limited impact

These steps may not arrest investment in gold. Increasing the margin by NBFCs may not have an impact on the loan disbursed. People may pledge more jewels to borrow money as per their requirement.

Even if banks do not finance purchase of jewels, they (jewels) can be purchased on credit from a jewellery shop and pledged without disclosing this to the bank. Out of the loan proceeds, the jeweller can be paid.

At least when loans were given for purchase of jewels, it was for monthly wage earners. The new measures could lead to investment in gold through futures without any reduction in gold investment.

Though some are advocating ban on import of gold or increasing duty manifold on gold import, this may not be of much use as it may lead to smuggling. We had witnessed the smuggling of gold and its underworld operations during the 1960s and 1970s.

To start with, jewellery loans by banks can be banned. People will have two alternatives. One is to sell the gold for their requirement and this will reduce gold consumption. Another possibility is to borrow at higher rate of interest from NBFCs and indigenous bankers. This will also act as disincentive to holding jewels.

One may argue that jewel loans are useful to agriculturists. However, jewel loans are used for non-agricultural purposes and by non-agriculturists in rural areas, as the documentation for obtaining jewel loans for agricultural purpose has been diluted.

Another strategy is to reduce inflation, which will automatically curtail investment in commodities such as gold.

(The author is a banking consultant.)

(This article was published on December 17, 2012)
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