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Insights into Gold-Related Schemes in India

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Nov. 27 2015, Updated 1:05 p.m. ET

Gold monetization insights

Under the gold monetization scheme in India, the minimum tenure of a deposit is proposed to be fixed at one year and after that in multiples of one year. Breaking the deposit will be allowed similar to the fixed deposits scheme.

Interest on deposited gold will be in the form of the value of gold. For instance, the account balance of the individual who deposited 100 grams of gold at an interest rate of 1% p.a. (per annum) would be 101 grams after one year.

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The option of redeeming the gold deposited in either cash or gold has to be exercised at the time of opening the account. This means that if a depositor opts to redeem in gold, physical gold will be given at the time of maturity. If a depositor chooses cash, the amount equivalent to the prevailing market value of gold at the time of maturity will be given.

Sovereign gold bond scheme

The RBI (Reserve Bank of India) will be issuing the bonds to investors on behalf of the Indian government, which has an annual cap of 500 grams per person. The bonds will have a tenure of 5–7 years and can be exited in three years in case of a fall in gold prices.

The loss of gold in the event of a drop in price would be borne by the Indian government. The interest on these would be subject to change from time to time, just like any other bond investment.

The recent rout in prices in the third quarter has led to a rising demand for gold in India. With the government’s interest-offering schemes, gold may be adversely affected. In the case of a possible price drop in gold, silver may follow the same route due to the high correlation between the two.

ETFs that may also be affected by such a fall include the iShares Silver Trust (SLV) and the Sprott Gold Miners ETF (SGDM). Mining companies such as First Majestic Silver (AG), Royal Gold (RGLD), and GoldCorp (GG) would also be affected. These three stocks together make up 12.7% of the price changes in the VanEck Vectors Gold Miners ETF (GDX).

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