Dhanteras: Declining gold imports is making yellow metal an attractive investment

Gold enthusiasts go to the extent of advising that one should make investment in gold on the eve of Dhanteras every year a la Systematic Investment Plan (SIP) of mutual funds. SIP over a long period of time evens out the gyrations in the stock market given the reality of averaging and booms and bottoms so that the investor doesn’t have to do the near impossible task of timing the market.

 Dhanteras: Declining gold imports is making yellow metal an attractive investment


In this light the parallel drawn between SIP in stocks and annual Dhanteras eve investments in gold does sound pragmatic---you keep up with your religious beliefs while at the same time investing for the rainy day. Indeed gold can be one’s rain check given its scarcity value.

India produces zilch and the world has nothing to boast either in terms of fresh discovery of gold deposits. Oil companies are casting their net far and wide because oil besides being characterized by an inelastic demand has practically no substitute. That is not the case with gold which is why gold hunters don’t show the same enthusiasm as oil explorers.

It is therefore clear that what enters the market is either recycled gold or hoarded gold. The industry tracker GFMS says gold imports during the first nine months of 2016 has registered a dramatic fall of 59 percent in terms of quantity vis-a-vis the previous year, giving rise to the presumption that for the complete year the economy would manage with just 400 tonnes of imports from the earlier dizzying levels of 1000 tonnes per year that was a huge strain on our precious forex resources.

At the same time gold prices in India have appreciated significantly---at the beginning of 2016, gold price in the domestic market stood at around Rs 25,070 per 10 gram, while it closed at Rs 30205 per 10 grams on 25 October, as per India Bullion and Jewellers’ Association (IBJA) figures. This is scarcity value at work heightened by heightened ETF investments in gold.

The government must be lauded for promoting the idea of paper gold---investing in gold bonds as opposed to physical gold. The sixth tranche of sovereign gold bond opened on 24 October 2016 and will remain open till the 2 November 2016. Unlike the first five tranches, this one offers Rs 50 discount per gram vis-a-vis the market price of the gold while at the same time reducing the interest rate from 2.75 percent per annum in the earlier five tranches to 2.50 percent. One may say this is a clever sleight of hand jugglery! As in the earlier tranches, the minimum investment is one gram and the maximum five hundred per person. Bonds are available in denominations in multiples of one gram. Like the earlier issues the sixth tranche would also be for tenure of eight years, with one having the freedom to exit from the fifth year onwards. From the last two tranches, the government mobilized Rs 1,900 crore.

Gold bonds score over ETF in two major respects---no expenses plus assured return of 2.5% in addition to the upfront discount of Rs 50 if one considers the benefits of investing in the sixth tranche.

The government must be commended for timing the issue to coincide with the festive season marked by the Dhanteras exuberance. For the government of course there is a worry---what would happen at the time of maturity of all these six tranches of bonds. Well it may have to fork out from its coffers if the gold quotations move up vis-a-vis the issue price. But what the heck, at least for five years it has pro tanto staunched the forex outgo on gold imports account. It would cross the bridge when it comes to it!

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Updated Date: Oct 27, 2016 13:10:27 IST

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