Make The Most From Gold

Gold has an enduring appeal and extensive functionality. It is also unique as it is both a commodity as well as a monetary asset. Gold has for long been recognised as a ‘store of value'; a ‘hedge against inflation'; and represents ‘liquidity/diversification of portfolio'.
It is advisable to keep 5-15 per cent of one's portfolio as gold in normal times. This proportion can go up in times of economic turmoil. Gold prices have had a steady rise from about $20 per oz at the turn of the previous century to over $1,400 per oz at present.

Since the abolition of the Gold Control Act in 1990, there has been steady liberalisation. In 1997, authorised agencies were allowed to freely import the yellow metal. The legalisation of futures and forward trading in bullion came in 2003; gold exchange traded funds (ETFs) were launched in 2007 finally.

Dominance Of Gold In India
Gold is the largest item in the portfolio of most Indians and for many the only form of saving they trust. If we assume the gold held by an average Indian in his personal capacity at 10 gm (that is a value of Rs 20,000), then the stock works out to about 24,000 tonnes with a market value of Rs 48 lakh crore.

Gold is a major forex asset; India's gold stock at international gold price ($1,400 per oz) would be valued at $1,075 billion. Gold is the most liquid asset in India. Rural bank branches work for only three or four hours a day, while the local jeweller is available 24x7.

India is the world's largest gold consumer. The domestic consumption of gold is about 1,000 tonnes. There are two major sources of procuring gold from the open market to meet the domestic demand — imports and recycling of old stocks. At present, only one-third of domestic demand is met by recycled gold and the balance two-third is met through imports.

Gold As A Commodity
There has been debate on the nature of gold the world over as it has all the characteristics of both a currency and a commodity. In India, the matter was referred to the Reserve Bank of India (RBI), which classified it as a commodity. This means that all states and local authorities can tax gold. Thus, we have sales tax, VAT and octroi on the official flow of gold in this country. However, inter-state movements in most cases are unofficial as the trade cannot afford a tax on it.

Market Scenario
India is the world's largest jewellery market with 25,000 tonnes of gold stock. Most of this is with individuals. The official reserves of gold with the central bank are a modest 575 tonnes.

Gold jewellery buying is associated with a number of festivals and weddings. A feature of Indian demand, over half of which comes from rural areas, is its sensitivity to price volatility but not to price as such.

Gold Products In India
Gold ETF: This is still in its infancy and is designed to service the small investor.
Gold Deposit Scheme: This scheme has the State Bank of India as the only player. The product, however, has not yet been aggressively marketed across India.
Gold Accumulation Plan (GAP): This is not in the organised sector. In a crude form, GAP is being run by most jewellers.
Gold Paper Product: This is in its infancy.Gold Futures: Active on MCX and NCDEX.
Gold Forwards: Active in the banking sector with some restrictions.
Gold Options: This is almost absent.

Bullion Retailing
On the bullion retailing front, banks can cash in on the guarantee of quality of gold, but their share of business is still very small. However, the contribution of the banking channel in restarting investment in the bar form is tremendous. Banks and the organised financial sector would be active in the growth of the bullion investment sector. We would then have organised gold accumulation plans and gold deposit schemes. Gold ETFs should also expand their base. Once this sector becomes organised with multiple schemes, we could use the vast gold hoardings in a constructive way.

The author is a chartered accountant and founder of B.N. Vaidya & Associates

(This story was published in Businessworld Issue Dated 28-03-2011)