The government's new set of gold schemes have been launched, giving final shape to the strategy for reducing the ruinous level of gold imports into the country. The quantum of gold that India imports is truly horrendous. One always hears how much tonnage or how many dollars worth was imported in a particular year.
Here's a comparison that will put this into perspective: In the years since 2001, Foreign Institutional Investors have brought in 157 billion US dollars into India to invest in the equity markets. Over the same period, the value of net gold imports into India is 269 billion US dollars! Think about it. All those massive inflows of dollars which have driven our stock markets for the last fifteen years, and they covered barely half of the great Indian gold splurge which has sent out the equivalent of ₹18 lakh crore out of the country.
Almost all of this is bought out of the savings of individuals, whether they keep it in their own homes or they give it away to religious establishments. Can you imagine what a transformational impact this money would have had on these savers as well the economy had it been saved as financial instruments instead of frittered away on this useless and unproductive metal, all of which it has to be imported?
In the new gold schemes, the government has made a determined attempt to tackle the problem. Compared to buying physical gold, the new gold bonds are a vastly superior way of buying gold. Moreover, compared to the tentative details that were in the air when the scheme was first mooted a few months ago. Then, it was said that gold bonds would pay 1 per cent over and above the value of gold and the minimum ticket size would be equivalent to five grams of gold. On launch, it has turned out that gold bonds are much better than that--the minimum size of investment is equivalent to two gram of gold, and the interest rate that you will earn over and above gold appreciation is a phenomenal 2.75 per cent.
An investment in gold bonds is simple to understand. If you'd like Instead of buying 10 grams of gold as investment, you buy a 10 gram gold bond, which will be available from banks, post offices and other places. The tenure of the bond is eight years. After eight years, you redeem the bond and get whatever is the value of 10 grams of gold at that time. The difference between buying physical gold and the bonds is that you will get 2.75% per annum on the investment value. Compounded over eight years, this is an extra gain of almost 25%. So, for example, if you invest ₹26,800 in these bonds and the price of gold becomes one and a half times in eight years, you would get back ₹42,200, which is the gold appreciation (₹13,400) plus an extra ₹6,493 which is a gain of 2.75% p.a. on the original ₹25,000.
It's important to note that the 2.75% extra is on the original invested amount and not on the changing value of your gold investment. I've observed that most analysts take this as a negative, implying that this is a downside. However, that would be the case only if you assume that gold cannot decline. The reality is that gold can easily decline or become static for extended periods of time. In that case, having a separate assured return of about 25% over eight years is a great guarantee that you will be better off than those who just buy physical gold.
The advantage in the accompanying gold deposit scheme is only slightly lower. There, holders of gold who are not using it can deposit it with banks and earn 2.25 %to 2.50% interest over and above whatever the change in the value of their gold is.
Of course, none of this is of any relevance to those who hold gold as a substitute for unaccounted cash. However, for those who are buying and holding gold as legitimate tax-paid wealth, these schemes offer the advantages of extra returns, as well as freedom from worrying about purity and physical security. Of course, none of this should detract from the fact that gold is a useless investment, with far less upside (if any) compared to equity mutual funds, but if you insist on investing in gold, then this is the way to do it.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
