All you need to know about Gold Monitisation Scheme and Gold Sovereign Bond Scheme

A- GOLD MONITISATION SCHEME

About-  Banks will collect gold for up to 15 years to auction them off or lend to jewellers from time to time. They will pay 2.25-2.50 per cent interest a year, higher than previous rates of around 1 per cent.

Period Involved-  The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes.

Procedure-        

1.       It is important to check your gold's purity and thankfully that can now be done through Collection and Purity Testing Centres. You can take your gold in any form to these centres and they will assess the gold in front of you and provide you with a certificate on purity and gold content, once you decide to deposit the gold in one of the deposit schemes.

2.       The designated banks may sell or lend the gold accepted under the short-term bank deposit to MMTC for minting India Gold Coins and to jewellers, or sell it to other designated banks participating in the scheme.

3.       Investors will have to disclose their PAN, registered with the income tax department, if the value of gold is worth more than Rs. 50,000. Some people fear it is a way for the government to keep a tab on the source.

4.       People can deposit a minimum 30 grams of raw gold - bars, coins, jewellery excluding stones and other metals. There is no maximum limit for deposits under the scheme.

Benefits

1.       The gold monetisation scheme earns interest for your gold jewellery lying in your locker. Broken jewellery or jewellery that you don't want to wear can earn interest for you in gold.

2.       Your gold will be securely maintained by the bank. 

3.       Redemption is possible in physical gold or rupees hence giving your gold purchase further earning opportunity.

4.       Earnings are exempt from capital gains tax, wealth tax and income tax. There will be no capital gains tax on the appreciation in the value of gold deposited, or on the interest you make from it.

Doubts on success

1.       Industry experts and bankers say many prospective depositors may not take up the monetization scheme due to concerns that the tax department could question the source of gold.

2.       Another concern is the likely loss of 20-30 per cent of the weight of jewellery as it is melted at certified centres at the cost of the depositor. Also, say experts, some people may find conventional bank deposit rates of 8 per cent more attractive.

3.       Most Indians look at gold linked to tradition and customs, rather than as a mere investment asset. Parting with their gold ornaments, even the idle ones, is a last resort for her. It would be unwise to expect households to actively participate in any schemes that involve ‘melting’ the long-preserved jewellery. The past record of the gold deposit schemes that have so far received lukewarm response is a proof for this. For instance, SBI’s gold scheme, though in existence for several years, hasn’t taken off well as the bank has managed to mobilise only about 8 tonnes so far.

B- GOLD SOVEREIGN BOND SCHEME

About- The Government of India has launched the Sovereign Gold Bonds Scheme. As investors will get returns that are linked to gold price, the scheme is expected to offer the same benefits as physical gold. They can be used as collateral for loans and can be sold or traded on stock exchanges. Additionally it offers 2.75 per cent interest to domestic investors to cut physical buying. Interest on gold bonds will be payable every six months.

Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of gold. Minimum investment in the bond shall be 2 grams. The bonds can be bought by Indian residents or entities and is capped at 500 grams.

Investors can apply for the bonds through scheduled commercial banks and designated post offices. NBFCs, National Saving Certificate (NSC) agents and others, can act as agents. They would be authorised to collect the application form and submit in banks and post offices.

On maturity, the redemption proceeds will be equivalent to the prevailing market value of grams of gold originally invested in Indian Rupees . The redemption price will be based on simple average of previous week’s (Monday-Friday) price of closing gold price for 999 purity published by the IBJA. Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond.

Benefits:

1.       The Sovereign Gold Bonds will be available both in demat and paper form.

2.       The tenor of the bond is for a minimum of 8 years with option to exit in 5th, 6th and 7th years.

3.       They will carry sovereign guarantee both on the capital invested and the interest.

4.       Bonds can be used as collateral for loans.

5.       Bonds would be allowed to be traded on exchanges to allow early exits for investors who may so desire.

6.       The risks and costs of storage are eliminated.

7.       In Sovereign Gold Bonds, capital gains tax treatment will be the same as for physical gold for an 'individual' investor. The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption.

8.       Investors are assured of the market value of gold at the time of maturity and periodical interest.

9.       SGB is free from issues like making charges and purity in the case of gold in jewellery form.

10.   The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

Reap a GOLDEN Harvest

Source: Dalal Street.

Gold as an investment option is now making rapid inroads into the Indian psyche but most buyers make the cardinal mistake of simply purchasing gold from retailers rather than checking out the option of buying it from a bank.

Golden Pointers

1. Buy gold bars and coins instead of jewellery for investment. You may not get a good price for jewellery because of the making and processing charges involved.
2. Look for 'PAMP Swiss' gold sign or 'Assay Certified' on gold bars and coins. It is a sign of quality and purity.
3. Buy only from an established bank.
4. If you sell gold before three years of buying it, you have to pay 30 per cent capital gain tax and
5. 20 per cent if you sell after three years.

  

For And Against

The main reasons why gold finds a place in many portfolios include:

1. Gold has historically proved to be a good hedge against inflation.
2. It is liquid and can be easily converted into hard currency.
3. It has ornamental value, more so for Indians.

On the other hand, investment in gold also has its disadvantages such as:

1. It does not provide regular current income as, for example, debentures which pay interest. In fact, gold bonds did not take off and lending of gold for a fee is not a viable option for retail investors.
2. It does not offer any tax advantages as, for instance, investment in a infrastructure bond that entitles one to certain tax advantages
3. There is a possibility of being cheated with respect to the purity of the metal except when buying from banks.
4. There is a storage cost involved in preserving gold.

When it comes to gold and especially jewellery fashioned out of it, Indians have more than just a materialistic value attached. There's an emotional bonding too. That's because, traditionally, Indian families have not only viewed gold as the safest mode of security but have found an ample use for it to cement relation- ships by way of marriages, as goodwill gestures on the arrival of a child, gifts during festivals and so on. Gold, in our country, denotes love and affection. It is also used as a mark of respect and tribute. As such, it is common enough to find Indians keener to know about the fluctuations in gold prices than anything else.

With the global demand for gold touching new heights in the second quarter of 2008 (rising 9 per cent on a YoY basis) it seems to be a good opportunity for investors and gold lovers. The market is growing at a galloping rate of 12-15 per cent per annum. The domestic jewellery market is approximately to the tune of Rs 64,000 crore, of which almost 80 per cent is gold jewellery. The main driver being the investment factor, middle class and high net worth individuals (HNIs) buy gold keeping in mind that it could always yield good returns. Gold prices has been on an upswing and prices have doubled in three years.

At $ 21.2 billion, the global demand for gold reached new heights in the second quarter of 2008, rising 9 per cent as compared to its earlier levels. The global investment demand for gold showed the strongest surge, reaching $ 3.5 billion in Q2 2008, 29 per cent higher than Q2 2007, with particular strength in the US, China, Egypt and Vietnam. As our interaction with experts in the gold sector indicate, the best form in which to hold gold, from an investment perspective, is probably as gold bars (or, as is termed, biscuits). Gold bars are standardized products whose purity is assured by the hallmark (seal of the producer) that each of them carries. There are no charges levied for making them and as the purity and quantity is assured, liquidation of these bars does not spring nasty surprises.

Many individuals are not too sure about the factors that need to be kept in mind when purchasing gold. People have often found themselves cheated when jewellers who have promised a quality standard of 22K have actually

delivered something not at par. The best way then to eliminate the risk of being 'taken for a ride' is probably to

spend time in selecting an honest and trustworthy source or an institution like a bank to make the purchase.

SOURCE AND FORM

As an investor looking for an assurance about the quality and purity of the product, the one place which can be deemed trustworthy in all respects is a bank and not a local jeweller or retailer. What one needs to under-stand is that banks sell gold based on guidelines defined by the Reserve Bank of India (RBI), which cannot be questioned or doubted. According to the RBI, banks can sell gold which is Assay certified and with tamper-proof packaging. This basically implies Swiss gold. One limitation is that gold bought from a bank cannot be sold back to it and when sold to a jeweller it yields a lesser value com- pared to its purchase price for the simple reason that there is now involved the cost of melting and reprocessing the gold.

From an investment point of view, one should invest in bars or coins and not in the shape of jewellery. You may not get a good price for jewellery because of the crafting and processing charges involved. One of the reasons that points in favour of adding gold to your investment portfolio is that it is a real asset whose value is driven by factors such as the amount of gold mined which are very different from those that impact the value of financial assets. Another reason is that gold is a good hedging tool against inflation. Therefore, it brings in a much needed

element of diversification as also security in a portfolio.

BRISK BUSINESS

In the past few months, banks have become rather aggressive in marketing gold bars. This escalation in the tempo

is due to the fact that banks have been trying hard to take advantage of the slump in the stock market. A bank will definitely give you a certificate assuring you of the purity of the gold, which a retailer will not. And that's why they charge a premium on the price.

Essentially, if you want to feel secured and comfortable about the gold you have bought, it is better to have certified authenticity rather than find at a later date that you have been cheated. When it comes to re-purchase options by a bank and a retailer, the former does lose out.

PARTING WORD

But even after you have made up your mind to buy gold from a bank, don't rush to the nearest one. Our reality check revealed that there is a lot of price variation by way of each bank levying its own premium rate. Therefore, do your homework well before you buy gold.

Time for an alternative therapy

Source: The Economic Times.

Commodity futures offer greater returns than those from equities, but find no place in the portfolio of retail investors. It's high time investors changed their world view.

It's time for a rejig. For long, investment portfolios in India have been dominated by equity, fixed deposits, real estate, jewellery and bonds. Now's the time to stand up and say 'In Gold we trust'. As the market turns volatile and uncertain, investors can look for lucrative options in the commodities futures market. The futures market kicked back to life in '03 after a four-decade ban, opening up a new range of investment opportunities. It's rather paradoxical that though the futures market offers a depth not found in equities, commodity stocks are missing from the portfolios of most retail investors.

Commodities like crude oil and steel respond to global cues, and investing in them give exposure to global growth. They also take care of inflation - a definite advantage over most other asset classes. It has been proven that gold beats inflation by a safe 2%. And if you go by what international commodity expert Jim Rogers said last year, "the global bull run in the commodities market has at least eight more years to run and may not lose steam until 2022."

Commodity derivatives are traded on the Multi Commodity Exchange of India (MCX) and the National Commodity Derivative Exchange of India (NCDEX). The commodities traded include gold, silver, agricommodities including jute, onions, sugar, grains, pulses, spices, oils and oilseeds, mentha oil, metals, natural gas and crude. There are 72 listed commodities, but only 15 of them are actively traded. The size of the domestic commodity market is over Rs 33 lakh crore, compared to Rs 5.7 lakh crore in the initial years. The average daily turnover is Rs 20,000 crore, against Rs 50 crore in '03. Gold alone accounts for 28% of the traded volume, whereas all the 11 agricultural commodities account for another 28% of the total volume.

By buying in the commodities market, investors can hedge their investments in the stock market. For example, if steel prices are expected to increase in the near future, selling stocks of companies which use steel as raw material and buying steel futures in the commodity market will help lock in high returns. Keeping in mind factors like volume on the exchange, volatility and past track record, ET has identified some commodities that offer investment opportunities.

Gold
Regarded as the safest haven, gold is also a good inflation hedge. With the dollar in doldrums, many economies are voting in favour of the gold standard. The supply of gold has been declining since the past five years. Net oil exports as a percentage of GDP of the US and Asia-Pacific are back to 1970-1980 levels and any persistent rise in energy prices will throw global growth out of its trajectory, while fully supporting the precious metals. The launch of ETFs will require almost 600 tonnes of gold and this will convert into a 5% incremental demand each year for the next three years. Fund allocation for gold as an asset class has risen to 10% from 5%. Though gold peaked to $725 an ounce last year, prices don't seem to be settling down in the near future. From last year's average of $608, gold could average out at approximately $665-670 levels.

Agri Commodities
The geographical division of land between the Northern and Southern Hemispheres, as well as different planting and harvesting seasons, make agri-commodities a short-term bet for not more than three months. Indian crop is also divided between rabi and kharif cycles. Hence, we cannot ignore them.

Cotton
By April-May, the acreage for cotton in the US is expected to shrink; hence the surplus available for export will be lower. The Indian arrival for '07-08 is also expected to be slow. However, China's demand is expected to pick up, keeping the price of global cotton firm. It is expected to peak up to 58-60 cents a pound by September.

Soy Seed/Oil
The soybean harvest from South America will start coming in by next month. The growth of the biofuel industry in major economies like the US and EU has given a boost to edible oil prices. Soy oil prices in '06 have shown a clear uptrend, which is still intact. Since India imports a major chunk of its palm oil from Malaysia, the price trend in palm oil also affects local soy oil prices. Palm oil is a substitute for soy oil and fluctuation in the price of either oil changes the demand pattern to some extent. The expectation of oil seed shortage in '07 could make the supply of vegetable oils a lot tighter. Also, the diversion of these oils towards making biofuels will increase the demand to a great extent. The emergence of new demand and overall shortage of supply in '07 is expected to keep soy oil prices firm.

Jeera
The West Asian crisis has blocked the cumin seed export route from Syria, diverting trade to India. Recent unseasonal rains in the North also played havoc with the crops. So, surging demand is likely to tighten domestic prices.

Pepper
Global markets are likely to witness a short supply as Vietnam - the largest producer and exporter of pepper in the world -is not releasing production. In India, farmers have shifted to alternate crops, so production is low. Since the quality of Indian pepper is very high, there is pressure from the global market. This will impact prices positively. Uncertain weather behaviour will have an important bearing on expectations for all agri-commodities . Hence, ideally, an exposure of not more than three months is suggested.

Non-Ferrous Metals
Zinc & Nickel: They are used as alloys for manufacturing stainless steel. The rapid industrialisation of China and India and infrastructure requirements in East European countries are boosting stainless steel demand. Such strong demand will choke supply and lead to price spikes. The London Metal Exchange inventory, at one day's average consumption, is at an all-time low. The demand from developing nations will drive metal prices higher. Although a cooling effect can be seen in the commodity market compared to last year's flush, it's far from over. The current slowdown in the market is the outcome of the ongoing consolidation. Increasing company expenditure, shortage of mining supply, entry of FIIs and increasing monetary inflationary trends will keep the commodity market on a high.