Known collectively as gold monetization schemes (GMS), these various offers for Indian citizens to put their gold to financial use by depositing into an account were not catching on initially. After being introduced in November of 2015, the various deposit schemes had only garnered about 3 metric tonnes of gold over the first six months. This pales in comparison to the tens of thousands of tonnes of physical gold that is estimated to be in private hands around the country.
One can hardly blame Indians for being skeptical of these ideas; there's no safer bet than simply holding your physical gold. Moreover, a great deal of the Indian population lives in rural areas that has little access to banking services. You can only expect people to be distrustful of something with which they are wholly unfamiliar. Much of the gold is held in the form of jewelry.
Another catch that has deterred many rural farmers from embracing the GMS is that they are often required to register their purchases of gold into a national identification database. For communities that are not keen on entering the banking system, the tracking—and possibly taxing—of their future gold purchases is an even more foreign notion. Buying gold is an annual and even seasonal exercise for most families in India. The desire for gold from the world's most populous democracy is so strong that imports of gold have remained strong in spite of the resistance to the GMS.
On one level, the GMS are intended to provide the gold-rich Indian public with access to financial services. In another sense, they are also intended to curb the country's mounting trade deficit as a result of so many gold imports.
One of the early contributors to the gold deposit plans have been Indian temples. It is believed that upwards of 5,000 tonnes of gold lies idle in these various temples, left there as religious offerings. The gold then becomes the property of the temple itself. After initial skepticism, some of the country's largest temples have decided to monetize their ample gold stockpiles in order to earn interest on the bullion. These plans especially make sense for temples, which are institutions unto themselves and have an even more pressing requirement for financial services.
Recently, however, it seems that Indian citizens are beginning to warm up to the idea of earning a bit of interest on their gold. As part of the country's Sovereign Gold Bond program where depositors can earn 1.75% or more by essentially leasing their gold for one, three, or five years, an impressive 2.95 tonnes have been received by Indian banks since late July.
Further, the GMS programs are beginning to have the desired effect of limiting the country's enormous gold imports. (Because India produces very little of its own gold, high demand for the metal brings in between 800 and 900 tonnes on an annual basis.) So far this year, a comparatively small 130 tonnes of gold have entered the country. If this pace holds, it will be the lowest amount of gold imported in more than 20 years.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.