GOLD Deposit Scheme – Is it really worth?

21 May 2015

GOLD Deposit Scheme – Is it really worth?

Greetings from Hitesh! Our last post on Living without Obstacles and Stress has been well received and appreciated like anything. I thank each one of you for your emails and word of appreciations. Govt has come out with the draft on GOLD Deposit scheme in the new format and it is kept open for discussion till 2^nd June. I am giving my views on the same.

The most unique features of the scheme are as under:-

1.  Interest on Deposit will be TAX Free.

2.  Gold kept in deposit will be free from Wealth Tax and Capital Gains Tax.

3.  Minimum Gold can be kept is just 30grms, so as to make it useful to small investors.

4.  Interest can be received in GOLD Terms or Rupee Terms – however you need to tell your preference at the time of joining the scheme.

5.  Interest rate can be decided by BANKS offering scheme – however it is expected that it will be about 1% per annum. So, if you keep 100gms of gold – you will get 1 gram additional gold.

6.  Maturity proceeds can also be received in GOLD or CASH.

 What will Banks do with this GOLD?

1.  Your gold will be given to refineries and converted into pure gold.

2.  They gold can be sold to generate FOREX by banks.

3.  They can convert the GOLD into Coins and sell it to other retail investors.

4.  They can lend this gold to Jewellers and earn interest on that.

5.  They can play in MCX or other commodity exchanges and make money.

Our comments on the GOLD Deposit Scheme:-

I appreciate the Government’s intention to create the liquidity from the non-liquid assets like gold. It is really a good intention and it can really help our country to reduce our gold import bill going forward.

Last November they launched KVP with such noble intentions and target of collection was fixed at Rs.30000 crs for 2015-2016. We have yet to see the figures of the same since November.

All noble intentions to be successful needs to be practical and must take care of the ground realities of the market.

Let us see the Ground Realities from the bank point of view:-

This can turn out to be a great business going forward for the banks. They will use the GOLD mostly for Trading on Commodity exchange to increase their treasury income. Most banks in India are profitable due to treasury income and this will act as an additional source of income for them.

On negative side – last year a leading US based bank sold tons of gold without having it in physical custody. Same thing happened in India with one of our commodity exchange – when they issued fake receipts of the stocks. So, we may see some kind of scam going forward – if the scheme becomes successful.

Ground Realities for Small Investor:-

Let me share an example of father who has a daughter of 15 years of age and he is expecting that daughter will get married at 25 age. He is having 100 grams of gold. He keeps the gold to bank for say 10 years and he gets 1% per annum – he will get 110 grms is simple interest is given and it compounded he will get little over 111.56 grms.

The RISK REWARD ratio is not favourable. At current rate 100 gms of gold cost me say Rs.280000 and if the rate remains the same I get Rs.2800 per annum – does not make sense to me.

Gold is normally kept in ornament forms with normal investors. If they are hallmarked – they have a purity of 91.6%. Let me explain you if you give 100gms of jewellery to BANK.

1.  They will melt it and it will become 91.6 gms of pure gold (assuming your hallmarked gold has the purity of 91.6%).

2.  You might have to pay gold testing charges + melting charges + services tax (14% after 1^st june) on that.

3.  So, the first question – will I get the interest on 100 Gms given or the 91.6 grms of pure gold? Who will pay all these charges?

4.  If at all I get on 100grm – I will get back 110 grams at simple rate or 111.56 grams on compounded rate. Now, I go to jeweller to exchange the same for my daughter’s marriage jewellery.

5.  He will buy my gold at his BUY rate of the day and sell me his gold his sell rate of the day. Eg. His buy rate of 100% pure gold (24 carat) today is say Rs.28000 per 10 grams and sell rate of 91.6% gold may be in the range of Rs.26300 to Rs.27160. In reality is should be Rs.25648 (exact 91.6% of 28000!!). So, you are losing Rs.652(Rs.26300 – Rs.25648) to Rs.1512 per 10 grms (Rs.27160-Rs.25464).

6.  Now add making charges of 10% to 100% depending on the new design you choose. So, you end up paying Rs.25648 + 10% to 100% ( i.e. Rs. 2564 per 10 grams to Rs.25648 per grms.)

7.  Now let us assume that you have paid average making charge of just 15% and see the calculation.

8.  Rs.25648 + Rs.3847 = Rs.29495 per 10 grams. You sold your 100% pure gold at Rs.28000 per 10 grams and you bought new gold jewellery of 91.6% at Rs.29495!! If you convert this figure for pure gold - you have ended up paying Rs.32199 per 10 grams. Rs.4199 more for 10 grams.

9.  I got additional gold of 10 grams (from Bank) i.e.Rs.28000 and I paid Rs.41990 extra for the new ornaments of 100 Grams. So, my effective loss is Rs.13990!!

10.   We have assumed that they are giving interest on 100grams (against 100gram jewellery). If they give interest on pure gold 91.6 Grams gold then I will get my 100gms back and not 110 grams as per the calculation and my loss will go up!!

Now let us see What happens When we do not go for this scheme?

1.  You have 100 grams of hallmarked jewellery and you go to your jeweller. He will give you 100gms of hallmarked jewellery (if old is bought from him) against your old jewellery. Plus making charges + vat and other taxes.

2.  In this case – you end up paying 15% making charges as mentioned above. So, your effective loss is 15% - that is Rs.38470 for 100 grams.

3.  In reality – your daughter may like some old design and she may want to keep the same. So, you just have to pay for polish of the old jewellery.

4.  You need not take a risk on BANK or some SCAM that may come and may ruin you.

5.  If you die before the maturity and if your spouse and other members are not as smart as you are – they may have difficulty in dealing with banks to get back your gold.

6.  Today they are saying no TAX – after 5 years new government comes and they may change the policy!

7.  In short – total operation does not make sense from a small investor’s perspective.  

What about BIG Investors?

Say there are big investors and they have gold of 1kg and above. They will not give their gold at 1% to banks. They will give their gold directly to the jewellers as a loan. Currently jewellers are paying 6% to 12% per annum against your GOLD!!

Most big jewellers have their show room full of jewellery – if they buy all the gold and sell you – they will be in loss. They will prefer to pay 6% to 12% and borrow gold!!

Say they have borrowed 1kg gold and they are paying average 8% interest on that. For Rs.28 lakh(current value of 1kg gold) – they pay Rs.2.24 lakh.

From pure gold of 1kg, they will have hallmarked jewellery of 1.1 kg and their average making charges are say 15% - they are earning Rs.4.62 lakh as making charges. They pay Rs.2.24 lakhs as interest and they make Rs.4.62 lakhs. More than 100% profit officially. Now, you understand – why they can afford Bollywood guys as their brand ambassador?

So, for BIG investors – this is not at all attractive!!

Media says – people with black money will buy gold and give the same to banks!! Those who have real good black money – they will never fall into this TRAP!! They are much smarter.

My Personal Call:-

At the time of KVP – our call was simple – rather than creating a new system – ask guys to make simple fixed deposit with the bank with no questions asked. They did not listen to our advice.

This time also they are doing the same mistake. From economic point of view of small investors – this scheme does not make any sense. It’s better to hold your gold jewellery as it is.

When you are with Destiny Management, you are with TRUTH and only TRUTH. If you love our Transparency, Track Record and emphasis on TRUTH - you are welcome to join us. Do write to me.

Have A Great Thursday.

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Live With Passion…Invest With Passion.

Hitesh Parikh.