With both stocks and gold on fire, is yellow metal the new multi-bagger?

Geopolitical factors, de-dollarization, inflation hedging has increased demand for gold

The price of gold has reached an all-time high, hovering comfortably above $2000 per troy ounce with a forecast of its steep rise in years to continue as the asset class is enjoying tailwinds from a mélange of factors.

Geopolitical factors, de-dollarization, inflation hedging has increased its demand

John Stepak of Bloomberg has attributed gold’s most recent rally to the market perception of peaked interest rates, especially in the US.  "While rising rates did not turn out to be disastrous for gold on this occasion, it certainly helps to have that headwind removed. Secondly, the market isn’t going full-blown bond vigilante yet, but it’s aware that there’s a lot of debt around and it’s not clear how that is going to be repaid. Gold has no counterparty – its value does not depend on someone else’s creditworthiness — and central banks, despite everything, still own a lot of it for that reason," he argues. 

 

Third is messy uncertain geopolitics. When the future is uncertain, investors tend to hedge with gold since it is a decent hedge against other parts of your portfolio like equities, bonds, cash and property.

Central banks in 2022, increased their purchases of gold by 152 per cent, to over 1,136 tons. In 2023, central banks have bought a net of 800 tonns of gold so far this year.

"Year to date, central bank net buying of gold is 14 per cent ahead of 2022. Central banks have bought a net 800t of gold so far this year, the highest on record for that nine-month period," said the World Gold Council report.

Is the time ripe for India to revamp India's several gold schemes?

Gold has been a popular investment choice in Asian countries, including India. Storing physical gold doesn't generate any returns and can involve security concerns. Gold import also increases the current account deficit. To address these issues, the Indian government introduced the Gold Monetization Scheme (GMS), allowing individuals to deposit gold with banks and earn interest on it.

"The GMS allows a minimum deposit of 30 grams (some banks accept as low as 10 grams) with an interest rate at 1.5% to 2.5% per annum and capital gains are tax-free if held for three years. However, banks lack enthusiasm due to operational complexities. External parties' involvement increases fraud risk and the government's lack of support hinders scheme adoption," said Mahendra Luniya, Chairperson, Vighnaharta Gold Limited.

The GMS allows investors to deposit physical gold in any form – be it jewelry, coins, or bars – and earn interest on it. This gold is assessed for purity and stored safely by banks, offering a Gold Deposit Certificate in return. It's an ideal way to earn from idle gold assets, with tenures ranging from one to 15 years. 

"The current version allows gold deposits to be held over five or seven years with interest paid in rupees at the end of the term. But only six per cent of households are aware of the scheme and there are no incentives for banks to become involved in its operation," said World Gold Council in a report titled 'Gold investment market and financialisation: India gold market series.'

If meaningful amounts of gold are to be put back into India’s economy much more will need to be done to stimulate interest and encourage participation in the scheme.

"Even the continuous issues of Sovereign Gold Bonds since 2015 have not met the desired success (total mop up at 122 Tonne a fraction of our annual imports) despite delivering stellar returns to investors since the first tranche of 2015 redeemed (150% return with interest credit)," said SBI in a note. 

While the Gold monetization scheme is aimed towards investors wanting to earn interest on their gold, Sovereign gold bonds are government securities where investors receive the gold value at current market price in addition to interest at the time of maturity.

"SGBs are government securities denominated in grams of gold. They serve as a substitute for holding physical gold, with the Reserve Bank of India issuing these bonds on behalf of the Government. SGBs not only reflect the current market value of gold at maturity but can also be traded on the stock exchange," said Ankit Jain, Partner, Ved Jain & Associates.

 India also launched its first bullion exchange in 2022 at GIFT city, positioning the country as a market maker in precious metal price discovery and offering suitable hedging products to shield from volatility.

To capitalise on India’s enormous gold market opportunities, several fintech startups have entered the gold segment in recent years, disrupting the conventional gold buying and investing behaviour. From purchasing digital gold to getting loans against gold in a hasslefree, paperless manner, constant innovations are upending the traditional ways of doing business, noted SBI in a report. 

More and more banks are looking at launching their gold loan products and also forging partnerships with fin-techs. 

"The collaboration can be harnessed for a frictionless onboarding and dispensation system to attract people holding substantial physical gold as means of consumption related credit that also strengthens the banking system (collateral backed credit). Gold recycling needs focussed attention. In India, recycled gold comprises about 11 per cent of the supply. Gold sold back for cash is usually linked to consumer sentiment and the economic backdrop. However, over the years the share of gold sold for cash has remained broadly steady, despite the economic slowdown of 2012-2014 and the pandemic. This is due to the vibrant gold loan industry in India, which makes it straightforward to borrow funds against gold rather than selling it," said the SBI report. 

Old jewellery scrap represents the largest source of recycling in India, with an approximate 85 per cent share of the total. The other key component is old bars and coins that people either sell or exchange for jewellery; these metals are estimated to make up about 10 per cent to 12 per cent of scrap gold supply.

"Given the precarious situation wherein both stocks and gold are on fire, while bond yields are retreating, the aftermath of monetary policy when Central Banks are emerging as largest purchasers of bullion suggests impeding de-dollarization by economies en masse…could India resort to better recycling and move towards an industry-specific Self Regulatory Organization (SRO) for this highly lucrative asset class that can help in streamlining higher imports

while also positioning India as a Jeweller to the World, duly collaborating with our diverse Indian diaspora as brand ambassadors?" asked Soumya Kanti Ghosh, Group Chief Economist at SBI. 

SRO, the ‘First level of Defence’ that builds trust and credibility through transparency, sustainability, governance and accountability, aligning with global benchmarks and eventually transforming into a beacon in setting the best

global practices for all while ensuring constant monitoring while adopting better compliance measures, professionalism, capability and capacity development, standards setting/certifications and harnessing market opportunities to serve consumers/customers across geographies is need of the hour, believes Ghosh. 

"The second largest gold-jewellery market globally, the fastest growing large economy of ours fostering an unmatched financialization and formalisation drive for a billion-plus populace can truly benefit from gold-centric measures, for both consumers as also financial stakeholders," added Ghosh.