India Plans Sovereign Gold Bonds

Govt to tap 20,000 tonnes of idle gold 

The Gold Monetisation Scheme provides for depositing gold in any form with banks for a period of one to 15 years that will earn interest while redemption will be at the prevailing value at the end of the tenure.

The Cabinet on Wednesday approved the Gold Bond and Gold Monetisation schemes, aimed at reducing demand for the precious metal in its physical form and pulling out idle gold lying with households and other entities into the banking system.

Sovereign gold bonds, on the other hand, are aimed at people buying the precious metal as an investment. Such bonds will be issued in denominations of 5 gm, 10 gm, 50 gm and 100 gm for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment. However, there will be a cap of 500 gm that a person can purchase in a year. Such bonds will be offered only to Indians and institutions while the securities will be traded on exchanges to allow early exit for investors.

My view:

India introducing gold bonds to support the banking system is an interesting development.  It appears to be a scheme to collect gold from individuals held out side the banks with promises to pay interest on the gold deposits.  What is not clear, but what the writer suspects, is the interest will be paid in the local currency, not in gold as the gold bond scheme Turkey proposes.  So call me skeptical and suspicious, but this appears to be another construct to prop up a flimsy banking system that benefits the ultra wealthy and government cronies and very few ordinary citizens.