Column : How to stop the gold rush

Jan 10 2013, 00:45 IST
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SummaryGiven its ‘traditional’ value in Indian society, people will not willingly give up buying gold even when the prices rise.

The issue of control of gold imports has once again come to the forefront, especially after the recent current account deficit numbers showed some disturbing trends. India accounts for around a quarter of global gold consumption. RBI has brought out another lengthy discussion paper on how one can control gold imports. A number of measures have been recommended and the report actually covers all options.

Gold has a very important place in Indian society and is consumed by even the poorer classes. It is held for the purpose of security as well as vanity. This point should be considered whenever we look at options for lowering demand for gold. These factors explain as to why India’s demand for gold kept increasing last year, even when the rupee had fallen by over 20%, which had pushed up the domestic price. Quite evidently, while we do look at ex-post factors that could have affected demand for gold like the underlying being a very good investment option, this could not be the driving force for such demand. Yes, there certainly is a class of people who buy gold for investment purpose, but they do not actually sell it when the price goes up--much like property, where individuals own multiple dwellings for creating assets that are rarely sold. If there is agreement on these factors, then some of the recommendations made by RBI can be examined.

RBI talks of gold deposits, accumulation and pension schemes. Will people really come forward and deposit their gold and take it back after say 5 or 10 years? If it is held for security or vanity, then this will not happen. Also, most gold held by households could be in the form of jewellery and not coins especially in rural areas, which makes such a scheme a non-starter as the individual would expect the same to be returned at the end of the tenure. If the idea is to churn this gold for meeting further demand, then the scheme may not work.

Earning interest on such deposits can be a valid temptation. But then the problem rolls over to the banks. They can recycle the gold, if it is not jewellery. But then what about the price and exchange risk which will come into play at the time of maturity? Also, in the terminal year, there could be a bunching of gold that will create problems for banks and the economy,

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