Skip to main content

RBI's Gold-linked Products Idea



RBI's latest attempt to introduce gold-linked investment avenues must be applauded. 

Gold is an incredible source of protection in our inflationary financial system. Among all investments of gold, it is the physical gold investments which will give the maximum return over long term. However, not every body needs a physical investments and not in excess of some amounts of protection.

The present gold-linked products available are ETFs and gold funds (MFs). These are directly linked to the price of gold and has no fixed return component, even though that is not the primary motive of this investment. There are plenty of people who are looking to buy gold as well as looking for a fixed savings account type returns. Certainly, these returns can and should be less than the normal interest rates. 

Frankly, no bank will be able to offer a interest rate deposit on gold, with the interest payment to be made in fiat and principal in gold. Simply put, inflation-adjusted bank is guaranteed to make loss on the transaction. It may however offer a lower rate or a floating rate much below standard savings bank rates which will help a bit

If RBI and banks are create such a product, then the burden of gold imports would decrease sharply. It has several benefits right from decreasing the current account deficits, helping Rupee, reducing the tax evasion, providing returns to investors, enabling banks to access a much stable deposit avenue at low costs, freeing up capital and giving investors a proxy inflation hedge. It would be a win-win all around.

One major caveat, I would like to mention is that how the repayment of the gold deposited would be made by the bank, and what happens if there is a default. In both cases, it is best for the investor / depositor to be repaid in physical gold. To be paid by proxy fiat would be failure pf protection against inflation. At least  investor / depositor should have the ability to seek the payments in gold, if so desired.

All this is fine, but I still don't see a reliable way Banks can make use of the gold in productive way. They may use the holding partially in bullion leasing market and partly in loan collateral  The best way forward is probably in allowing banks to categorize the gold holdings are part of SLRs, which will enable Banks to free up their liquid cash which can in turn be used for more ROIs.

It is to be seen if this idea really takes off. The gold-deposit scheme that is currently in operation is pretty much defunct due to operational / logistical problems. 

Comments

Post a Comment

Popular posts from this blog

Cognitive rules of business presentations

In his recent book, Clear and to the Point, Kosslyn explained that the four rules of PowerPoint are: The Goldilocks Rule, The Rudolph Rule, The Rule of Four, and the Birds of a Feather Rule. Here's how they work. The Goldilocks Rule refers to presenting the "just right" amount of data. Never include more information than your audience needs in a visual image. As an example, Kosslyn showed two graphs of real estate prices over time. One included ten different numbers, one for each year. The other included two numbers: a peak price, and the current price. For the purposes of a presentation about today's prices relative to peak price, those numbers were the only ones necessary. The Rudolph Rule refers to simple ways you can make information stand out and guide your audience to important details -- the way Rudolph the reindeer's red nose stood out from the other reindeers' and led them. If you're presenting a piece of relevant data in a list, why not mak...
Post a Comment
Read more

Monetary inflation, Spiritual devaluation

Its been sometime I have been trying to make some special people understand the evils of inflation. Inflation is an abstract subject most of us dont know about, let alone understand the technicalities amidst jargons. I have in my previous post have briefly touched the social part of inflation but never in a concentrated way. I understand what my friends mean when they say "tell me in layman’s language." It is not a heartening sign, that they avoid technicalities. But it could well be that knowing where they stand, their role and understanding the social changes in the light of inflation may motivate them to understand the term "inflation." This is just to highlight the brief points. First and the foremost, is there any link between inflation numbers and society. Yes. The relation is same as the relation between society and money. What is money? Money is an easy means of exchange. If I am selling my horses to a pig-farmer and I am not interested in taking pigs in ret...
2 comments
Read more

Unprecedented External Demand Shock Underway

India’s export growth averaged 24.8% over the last three years, driven by strong global growth. However, over the last three months, export growth has decelerated sharply. While until recently the strong demand from emerging markets including Latin America, Emerging Europe, the Middle East and Africa ensured that export growth remained healthy, over the last three months disruptions in the macro environment of these economies have been evident. Apart from weakening demand, exports have also been affected by the lack of availability of foreign trade credit and inventory liquidation. India’s exports declined by 12.1%Y in October 2008 compared with 10.4% in September and 26.9% in August. While we expect some improvement in the second half of 2009, exports are likely to be unusually weak over the next six months. We now expect exports to decline by 5.3%Y in 2009 compared with 12.7% in 2008 (estimated) and 23.1% in 2007 Excerpt source
Post a Comment
Read more