How the gold schemes announced in the Budget work

What shape will the two new gold schemes announced in the Budget take? We spoke to a few experts involved in the design to find out.

The gold monetisation scheme is designed to help you make returns from your idle gold or jewellery without having to sell it. If you deposit your old gold with the bank under this scheme, you can earn an interest, calculated on the value of gold. The other benefit is that the gold will be in safe keeping without your having to cough up locker charges. Older gold deposit schemes in existence offered 1 per cent interest for three/four-year deposits. But sources say that the new scheme will carry a higher interest to encourage people to come forward to monetise their gold. The Government intends to on-lend this gold to jewellers and reduce the country’s import bill.

The jewellery you deposit will be melted and assayed. Therefore, at the end of the deposit term, you will get back only gold bars and not your original piece of jewellery.

The other Budget announcement was on the sovereign bond scheme. Explaining its workings, Rajesh Khosla, Managing Director of MMTC-PAMP, an LBMA accredited gold refiner, says, “Let us assume that you buy 100 gram of gold today. In place of physical gold, you will get a gold bond representing 100 gram of gold and you pay for it.

At the time of maturity, you can redeem the bond at the value of gold on the date of redemption. The intent is to avoid unnecessary import of gold but at the same time give investors the benefit of the returns that gold offers.” Then, who will hold the underlying gold? Khosla says “Whether the Government will hold an equivalent amount of gold is something that is not clear now. But the underlying physical exposure can be secured not only by having physical gold but also by hedging prices.”

The sovereign gold bond scheme will also be offering interest payments on the amount invested. This will be in addition to returns you get from gold price movement. Market experts say the Government may also allow you to borrow against this gold bond.

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