The El Dorado In Indian Temple Vaults
There is an
estimated 3,000 tonnes of gold in India’s temple vaults worth billions of
dollars. This quantum of gold alone is
about two-thirds of that held at Fort Knox by the US Government. Another 17,000
tonnes approximately, is held by the citizenry, as a hedge against inflation,
the vagaries of paper money, and for traditional and religious reasons. And
there is more pouring into the country every day.
The Modi Government could well tap into much of this
El Dorado shortly, if it is willing to pay at least 5% on the gold
deposited, with an any-time withdrawal scheme alongside. But there is a lot of detailing yet to be done,
many sophistications to be incorporated,
before the proposed scheme/s can work in a dynamic fashion.
The interest rate that will be paid is indeed
crucial to the initiative’s success, because a similar scheme launched in 1999
failed for this very reason, amongst others. At that time, only 2.5% was
offered by way of interest. So the Government could garner only a paltry 15
tonnes of gold by way of deposits.
India imports at least 1,000 tonnes of gold every
year, representing over 25% of its trade deficit, and the Modi Government wants
to substitute a lot of this with its internal gold reserves, if the intended
new scheme works well.
The personal and some of the hundi offerings
of gold , if deposited with the Government, will be turned from jewellery and
ornaments, into bullion, wherever applicable. This will destroy both
sentimental attachments and virtuoso workmanship in certain cases.
This uniquely Indian, largely handmade workmanship,
is acknowledged globally to be amongst the finest. Some jewellery pieces
therefore are priceless, worth much more than their grammage and gold values. Some gold deposited in jewellery form may also be replete with embedded precious stones.
These will need to be separated and returned promptly. The worked gold
encasements can however only be returned in the form of equivalent coins and
bullion, albeit with Government certified 24 carat purity. The precious stones
can presumably be returned soon after the deposit is made, and before the
assaying and melting process begins.
Most Indian jewellery/ ornaments tend to be of at
least 21 carat purity. This is distinct from jewellery of European or American
provenance, that is not only often machine- made, except when made by the very
best jewellers, but largely in 18 carat.
For the purposes of these Government schemes, it is
the melted and reconstituted gold in 24 carat Government certified and
hallmarked purity, that will, of course, be the norm and standard.
Fortunately, some of the gold both in the temple
vaults and in family safe-keeping, is in the form of coins or bullion too. And it
will be both simpler and ideal to press this into the nation’s service at first.
The Government will have to maintain sufficient
buffer stocks at all times to tackle the issue of smooth withdrawals. This
could happen at any time, to varying degrees, for multiple reasons, rather as
in open-ended mutual funds. But more especially, if the international gold
prices rise sharply and individual depositors want to sell their physical gold
to book their profits.
Institutional temple gold may behave differently,
and that is why the Government may prefer to deal with it at first. Besides,
just one famous temple, the Shree Siddhivinayak Temple in Mumbai, dedicated to
Lord Ganpati, has an estimated $ 67 million in gold (some 158 kg in gold
offerings), in its heavily guarded vaults. And this temple seems willing to support this
Modi initiative given the right terms.
Temple administrations may not be attracted to
liquidating their assets even at much higher prices. They may instead prefer to
renegotiate even higher rates of interest from time to time, as with a bank,
that may well be the vehicles that the gold deposit schemes will use. This
could be based on higher gold values that may obtain in future years.
Besides some institutional gold investors may prefer
to have the Government pay a healthy, floating rate of interest, rathher like a
housing loan, on their enhanced and constantly revalued hoard. Others may
prefer to hedge against falling prices by going in for a fixed rate, for a
fixed and predetermined period and tenure.
There are many pointers the Government can take from
international Gold Exchanges and their practices, including the involvement of
Gold Hedge Funds, and existing schemes that offer gold shares and units. This
could let the Government also speculate in the commodity, while securing the
investor with Sovereign guarantees.
The Gold stocks held by the Government, even during
a specified lock-in period, if applicable, will need to be revalued according
to daily gold prices, both domestic and international. In the domestic context,
because of a constant high demand for traditional, ceremonial, and marriage
purposes, particularly during the auspicious marriage season, gold is generally
at a premium on the international pricing.
So, all Indian and NRI/PIO /diaspora/institutional
physical gold depositors, will expect their gold to be valued at the higher of
the two prices, both day-to- day, or even moment to-moment as in the case of
equity and currency, during share and commodity trading hours internationally;
and at the time of withdrawal.
And the daily interest rates payable, must be
calculated on the fluctuating daily value of the deposited gold, on a real-time
basis, as well. There may be an attractive arbitrage opportunity here, as in
the case of NRI bank deposits too.
There is, of course, some orthodox sentiment against
this proposal to leverage ‘God’s Gold’ for the mere sustenance of a trade or
fiscal deficit. But at the same time, the forces of Hindutva, tacitly
backed by many amongst the 80 per cent Hindu majority, are not opposed to the
idea of helping Narendra Modi’s sarkar, rooted in the
nationalist/patriotic RSS traditions.
Modi himself, austere in his personal habits,
scrupulously honest, devoted to engineering a greater prosperity for all,
inspires increasing confidence, both nationally and internationally. The Indian
people, as a whole, seem willing to let him access this gold and put it to work
for the benefit of the country.
If this patriotic fervour communicates itself to the
public, some of the additional 17,000 tonnes of gold could also be tapped.
Organisations such as Muthoot have been successfully working in the
space of ‘gold loans’ for individuals over a long time.
It is incumbent however to design the Government
schemes will sufficient advantages over whatever is currently available from
the private sector. And the ever-dreaded sarkari bureaucracy needs to be
replaced by efficiency, ease of use, and speed of execution, in practice.
For: The Pioneer
(1, 107 words)
April 13th, 2015
Gautam Mukherjee
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