Import gold duty hike and link gold ETF to gold lending

Good news for gold ETF investors

Increasing gold import bill and crude oil bill are the biggest cause of  worry to govt of India today. The government announced to raise duty on gold from 4% to 6% yesterday as the demand of gold is not reducing in our country and current account deficit is not coming down. To combat this situation the government has increased the duty on imported gold.

When we import the gold, our foreign reserve went out of the country. India has already imported gold worth 38 billion $ till third quarter of financial year 2012-13. This step is towards reducing demand and the improve the of forex reserves no.  

While it is still uncertain how much of an impact this 2% hike will make. Earlier such type of step we have already seenThe high price is driving the demand, and if the price goes any higher that will drive demand higher as well.

The other step is good news for ETF gold schemes investors. Apart gold duty hike, the other important announcement is linking gold ETF schemes to bank’s gold deposit schemes. When we buy a unit of a gold ETF, it represents about a gram of gold and the gold ETF sponsor buys and stores gold on your behalf with a custodian. This gold is lying idle and give no return at all.  The ETF’s gold will be linked to gold deposit schemes where gold merchant or jeweller can borrow the gold from banks and pay interest on this gold, and at a future date pay the money equivalent to the gold that they borrowed at the then prevailing price.

This will help reduce the import of gold to the extent that it is borrowed, but in the long term if the demand for gold doesn’t come down then it will not reduce imports, it will perhaps play a small role in delaying the imports but not make a long term impact on lowering gold imports or the current account deficit.

However, this would be good news for ETF owners because any interest or earning that the ETF earns out of lending gold will ultimately accrue to the owners and it would reflect in their schemes returns. The more details are still awaited, but if the lending starts, it would be good news for gold ETF investors.

Feel free to ask any queries related investment

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com