BOMBAY, 4 April 2005 — For Indian housewife Arpita Mohan, giving up her gold ornaments in exchange for a certificate is the last thing she has on her mind. “I feel good seeing myself in a mirror wearing a lot of jewelry,” she said from the northern city of Allahabad. “Given a choice, I will never prefer a certificate. I will choose gold jewelry, wear and sell whenever there is a need.”
And like Mohan, traders and analysts said that there are thousands of Indian households who would be reluctant to give up their gold to take part in a savings scheme introduced by the government in its budget for financial year starting April 2005.
India, the world’s largest gold importer and consumer, announced last month that mutual funds could launch Gold Exchange Traded Funds to enable people to buy and sell gold in units as small as about $2. The units can be listed on stock bourses. Details of the scheme are still being worked out.
Analysts say the move aims to attract investments in the metal from other sectors and tap into the 15,000 tons of idle gold — mainly in the form of jewelry and coins accumulated by households over generations — for productive purposes.
Although some see the scheme as a positive move, many feel the government has a tough job at hand. “Gold is more than a metal in India. It’s a culture. It’s a part of life,” said Ranjeeth Rathod, a bullion dealer. “And if a gold scheme takes away that culture from the Indian community, I don’t know how successful the scheme would be.”
Gold exchange funds, commonly known as “paper gold” are traded like stocks and holders are not required to physically buy gold. The value of the unit changes with the metal price.
India, home to more than 1 billion people, imports about two-thirds of its annual gold needs of up to 700 tons. Jewelry and coins account for 85 percent of the country’s gold demand.
Jewelry forms an important part of Indian weddings, as parents give their daughters the metal for financial security. Hindus consider gold an auspicious metal and like to buy or gift it during religious festivals.
“I can’t tell you that instead of a gold ring, I will give you a certificate that you can wear around your finger,” said Rajesh Mehta, India’s largest exporter of gold jewelry.
But there are many who see a silver lining in this. “Instead of having a pre-conceived notion about the cultural background, such innovative instruments should be tried out before predicting their success or failure,” said Rajan Mehta, executive director of Benchmark Asset Management Company.
The company sought the nod of the Securities and Exchange Board of India, the market regulator, way back in 2002 for gold exchange traded funds, but did not get an approval. It has again applied for approval. “We feel that the structure of the scheme is quite superior and gradually people will realize that.”
Industry experts say lack of awareness in such schemes and other modern investment plans and limited reach of banks and mutual funds in the country, where more than 600 million people live in villages, would restrict the popularity of the gold fund. “It will take some time to penetrate. I don’t expect very large numbers right away,” said Sanjeev Agarwal, managing director for the Indian subcontinent of the World Gold Council.
Some say the scheme could first attract urban people who may try investing a portion of their surplus money in the paper gold, or a small section of investors who purchase gold bars and coins. But rural India, which buys 70 percent of gold sold in the country, is likely to stay away. “Rural people still don’t have adequate faith in the banking system. How can you expect that they will be attracted towards something they can’t see,” said Dubai-based Nayan Pansare, chief financial officer of Rosyblue Fze, a diamond and jewelry firm.
