How does Gold monetization scheme work? Is it really useful?

Government of India has released the draft guidelines for its ambitious gold monetization scheme. Today’s headlines in the media said “Earn interest on your jewellery”. Interesting to hear this news, isn’t it? What if you could park jewellery sitting idle at home in a bank and earn interest on it? Is this as simple as it sounds? Read this article.

Ms.Goldy has over 500 grams of gold in the form of ornaments such as bangles, necklaces, earrings, etc. She keeps them in a bank safe locker and wears it as and when required. Mr.Chinnappa has told her that, instead of keeping the gold in bank locker, she can deposit them in gold monetization scheme (proposed to be launched by the government soon). By doing so, her jewellery is not only safe but also earns a reasonable interest on it. She can take back the jewellery as and when she wants (like the way she was withdrawing from her safe bank locker). Is this how scheme works?

No. this is not the way Gold Monetization scheme (GMS) works!

1. Ms. Goldy has to visit the bank and show interest in GMS. Then the banker will engage ‘purity testing centres’ to certify the purity of gold. The testing centres will tell the approximate amount of pure gold. 

2. If Ms. Goldy agrees to the amount as valued by the centre, she will have to fill up a bank/KYC form and give her consent for melting the gold. (which means the jewellery will lose its form and shape) 

3. Suppose, Ms. Goldy agrees for melting the gold, the purity centre will clean the dirt, studs, meena etc from the ornaments. The studs will be handed-over to her and right in front of the customer the jewellery will be melted through a fire assay. 

4. Even at this stage, if Ms. Goldy decides to take back the gold, she can do so! (But not in the form of ornaments but in the form of gold bars) after paying a nominal fee. She may agree to deposit her gold in which case, a certificate by the collection centre certifying the amount and purity of the deposited gold will be given to her. 

5. With this certificate, Ms. Goldy should open a Gold saving account and credit the ‘quantity’ of gold into this account for a period of 1 year and renew thereafter. 

6. The bank will commit to paying an interest to the customer which will be payable after 30/60 days of opening of the Gold Savings Account. Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms 

7. On maturity, Ms. Goldy will have the option of redemption either in cash or in gold. 

8. Ms. Goldy will get exemption from Capital Gains Tax, Wealth tax and Income Tax, etc. Basically, all increase in the value or quantity or gain from this scheme will be totally exempt from tax.

 This is about the way this scheme works for common citizens. There are other benefits to the banks, we will discuss about it separately.

Now the question is, whether this scheme is useful to the citizens?

• If the ornaments are converted into gold bars, how will it interest the citizens? If it is to be melted, they can as well sell it and keep the money in bank fixed deposits and buy gold as and when they want it.  

• Or they can also invest in Gold ETFs

• This scheme will be a sure success if the customer gets the ornaments in its original form. If not, I have my own doubts about the success of this scheme.

The government is estimating around Rs.60 lakh Crores of gold in the hands of households in India. (I hope this estimate is not like black money estimate Rs.70 lakh Crores!) Even if a portion of this idle assets gets into the economy, it will be a great help to the country. Will this scheme work? We will get to know down the line.