The great gold brush-off

If any further proof was needed that gold is losing its sheen as a safe haven, it is available in the recent collapse in bullion prices. After failing to make gains either during the Greek crisis or the Chinese stock market collapse, gold dropped to a five-year low, below $1,100/troy ounce. Normally, the prospect of a sovereign default should have had investors fleeing financial assets and seeking refuge in gold. But instead, right through the Greece standoff, investors fretted about whether the country would liquidate its 112-tonne gold reserves to meet its IMF dues. The Chinese stock market collapse should also have driven investors in the same direction. But Chinese investors sold and are continuing to sell their gold holdings to compensate for stock market losses. The People’s Bank of China recently disclosed that its gold reserves stand at 1,658 tonnes, half of what the market thought it had. Gold bulls had so far thrived on speculation that the Chinese central bank trebled its gold reserves to diversify from the dollar.

Global gold prices appear unlikely to recover from these blows soon. With the US economy in recovery mode and the Fed set to hike interest rates soon, the dollar is back as the safe haven for global investors. Falling inflation and oil prices have also undermined the case for gold. Needless to say, the collapse in global bullion prices is good news for India, which expends 8 to 10 per cent of its import bill on bullion purchases. With domestic gold prices plummeting 24 per cent in the last two years, Indian investors have already been pulling out of gold funds, to invest instead in bank deposits, small savings and equity funds. Surprisingly, this time around, even jewellery buyers haven’t gone on a buying binge as gold has turned cheaper. The jewellery trade has reported weak sales in the last three months, and the country’s bullion import bill has registered a decline. The reasons for this include falling inflation (which reduces the need for an inflation hedge), weak rural purchasing power (due to an erratic monsoon) and the Centre’s keenness to crack down on black money.

But whatever the reason, India’s unusual disenchantment with gold is a rare window of opportunity for policymakers to try and wean people away from this unproductive asset. A gold monetisation scheme may have many more takers now, with people more willing than before to cash in on idle gold holdings. A discussion paper on this was mooted a few months ago and there were suggestions that an interest of 2 to 3 per cent be paid on gold deposits, with tax breaks thrown in to sweeten the deal. There is possibly no better time than now to operationalise such a scheme.

COMMENT NOW