Gold Will Likely Become an Interest-Bearing Asset in India


Nov. 4 2015, Updated 11:50 a.m. ET

Could imports fall?

Previously, we discussed how India is promoting the gold monetization scheme. Read Why Is India Promoting Gold Monetization? to learn more. The news from the mainland tells us that the project’s investors can earn up to 2.5% interest on the gold. So, is gold an interest-bearing asset in India?

According to the Reserve Bank of India’s notification issued on Tuesday, November 3, the interest rate on medium and long-term government deposits of gold are 2.3% and 2.2%, respectively. The tenor of a medium-term deposit would be 5–7 years while a long-term deposit would for 12–15 years.

Banks giving good options to gold lovers could curb the country’s gold imports. India has taken the title of the “biggest gold consumer” from China. A curb on the imports from India led to a significant fall in gold’s price.

The above chart shows gold’s price performance in 2015.

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Tapping the markets

The Reserve Bank of India added that it would maintain the gold deposit accounts denominated in gold in the name of the designated banks. In turn, the banks will hold sub-accounts of individual depositors. Since the government has planned to initiate the scheme, it aims to tap 20,000 tonnes of idle gold worth about 540,000 crore—about $8,100—into the banking system.

Will the downward trend in gold continue?

Since we saw negative sentiments on gold running across the markets, the initiation of such a monetization scheme by the biggest gold consumer could probably lead to an additional fall in the bullions. Gold is down almost 5.8% for the year. Silver fell 3.1%. The ETFs that track the bullion’s performance like the iShares Silver Trust ETF (SLV) and the SPDR Gold Shares ETF (GLD) also fell 3.2% and 5.8%, respectively, on a YTD (year-to-date) basis. Most mining companies like Eldorado Gold (EGO), Kinross Gold (KGC), and Hecla Mining (HL) also saw negative returns on a YTD basis. These three companies account for 8.5% of the VanEck Vectors Gold Miners ETF (GDX).


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