We finally got our first look at one of the most important developments this year for gold investment: India's gold monetization and sovereign gold bond schemes.
And it looks like these plans have a chance of success.
India's national government officially launched its new slate of gold initiatives on Thursday, revealing full details on how these programs will work in attracting investment. Related: Political Climate Shifting Against The Oil And Gas Industry
The key question with the gold programs had been: what rate of interest would the government pay on gold deposits? With this being a critical part of success or failure for these much-anticipated measures.
The answer is: between 2.25 percent and 2.5 percent. With investors who deposit their gold at approved banks on a term of several years receiving the higher rate, while those opting for shorter-term deposits receiving the lower rate.
This is a significant improvement on India's previous attempts at gold monetization, which had paid just 1 percent interest on deposited gold. Related: Energy Storage Could Become The Hottest Market In Energy
There is, of course, no way to tell for sure if the new interest rates will be enough to coax significant amounts of gold into the deposit scheme. But preliminary indications are that India's citizens are interested -- with a UBS Securities poll showing that 50 percent of respondents were likely or highly likely to deposit gold under the new program.
At the same time, India also introduced sovereign gold bonds as another strategy aimed at curbing physical gold demand.
Under this program, investors pay for a paper equivalent of gold at the prevailing price of the day -- say 10 grams at $30 per gram, for a total investment of $300. They can then redeem the bond according to the gold price -- if gold rises to $45 per gram, they would receive a total of $450 when cashing in their 10 grams of paper gold. Related: Iron And Coal Could Have More Suffering Ahead
These bonds pay 2.75 percent interest -- offering a slightly higher rate of return, although not providing investors access to physical gold itself. One interesting aspect of these bonds is that a significant rise in the gold price could expose the government to rapidly ballooning redemption payments owed to investors.
This is a crucial development for gold investors globally to watch. If these new schemes do gain traction across India, bullion demand could be reduced in the world's top buyer of the yellow metal -- watch the results on gold deposited over the coming months.
Here's to scheming and dreaming,
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Dave Forest
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