RBI MIGHT BAN BANKS FROM SELLING GOLD COINS

Akshaya Tritiya, Diwali or Dhan teras….Banks will no longer give importance to these days for sale of gold coins.

RBI is considering banning banks from selling gold coins.

A central bank source argues that imports of Gold Bullion are exacerbating the Rupee's weakness against the Dollar, making a case for ending Gold Coins sales by banks. Banks were allowed to sell Gold Coins following a relaxation of rules on commodities trading aimed at sterilizing Dollar inflows, which saw the Rupee appreciate in the years before 2008. With the rupee depreciating 30% since August, and hitting a new low this week, at 57.16 to a dollar, the apex bank is looking to reverse the trend. At a recent meeting, bankers have been advised to go slow on gold coin sales.

India is the world leader in Gold consumption. Gold is seen as a safe haven for parking money given the present gloom in the financial markets. A bulk of its demand is met through imports which are putting stress on the current account deficit and the value of the rupee.

As per Government of India, Gold as an investment has 2 issues. Firstly, the investment is non-productive as gold is hardly used in industrial production and it has contributed to the high current account deficit of the country. Secondly, the foreign exchange reserve that is used to import gold reduces the availability of this resource to finance the import of other commodities.

Gold’s share in total import bill of the country has gone up from 8.1 per cent in 2001-02 to 9.6 per cent in 2010-11. The percentage share of gold and silver combined has risen from the 3^rd most imported commodity in 2000-01 to the 2^nd most imported commodity in 2010-11 behind only crude oil.

RBI wants to generate immense awareness amongst people to switch to other modes of investment. However, Some experts believe the RBI's attempt at market manipulation will merely increase the black market gold prices and speed up the decline of the Rupee when compared to other assets like gold and silver.

Rather than implementing new modes for curbing imports, the Government should promote Bullion export in the country as it does for the jewellery. When Bullion is exported, an extra 1.5% value charge is levied by the government on the exporters. Moreover to redeem Duty, the exporters have to pay around a percent to the banks. If a provision is created in this case, then we could see an increase in Forex reserves by the exports. Research & development is the key to the future of Indian bullion industry. India holds around 9% of the global gold reserves estimated at 14,000 tonnes but fails to generate wealth out of it due to weak investment in exploration and mining activities. As we know, India is one of the leading consumers of gold and could challenge the likes of China and South Africa in gold production provided the right policy decisions and enabling environment for gold exploration and mining is put in place.

Indian households have nearly 25,000 to 30,000 tonnes of Gold. Government should show an effective way to gain revenue by exporting it. Schemes like minimum tax scheme should be introduced wherein an investor is charged minimum tax to convert his/her unaccounted gold into an accounted one. By this the government treasury will also increase and the idle gold can be put to use. The other scheme can be a VDS scheme (voluntary disclosure scheme) by which the Gold /Silver can be brought to the market. Such ideas will have a win - win situation for all.

However, if this ban is imposed then, one person who will surely benefit with this action is the “common man”, as gold coins will become cheaper. Usually people who buy gold coins from banks are charged a margin on around 3% if this ban is imposed then customers will start buying from the bullion dealers and other jewelers who don’t charge such high margins. Hence coins will be available to them at comparatively low rates.

However this move is still in its planning stage and no decision has been taken so far.

PRECIOUS METALS REACTIONS POST FOMC MEET

The positive Greek Election results did give a boost to the equities market but there were mixed reactions from precious metals. Mainly because the entire market is waiting for the outcome from the Fed’s FOMC meeting.

The results of the Greek elections, in which the pro bailout party had won, didn’t seem to impress forex and commodities traders. All eyes in Europe continue to stare at Spain & Italy. In yesterday’s G20 meeting the leaders talked about the EU debt crisis and Spain’s soaring borrowing costs.

The G-20 meeting, held at Mexico continued for two days- 19^th and 20^th June. At the conclusion of the summit, leaders announced a U$430b firewall to give some stability to an increasingly unsettled global market. Safe-haven bids boosted gold as G20 leaders pressed Europe to do whatever it takes to combat Europe's crisis after a victory for pro-bailout parties in a Greek vote reduced the chances of a euro breakup but failed to calm financial market

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, started its two-day policy meeting - there were growing expectations that it will look to ease policy further to stimulate economic growth in the country. Many expected the Fed to extend its long-term bond buying program through Operation Twist beyond its current June deadline – the result being a weaker USD. ‘Operation Twist' programme implies funding the purchase of long-term debt by selling short-term notes - which is set to expire at the end of this month.

Fortunately these anticipations proved true. In a bid to reduce unemployment and protect the expansion, Fed has decided to extend Operation Twist till the year end with a sum of U$267, but no announcements regarding QE3 plan have been made.

Immediately after the meeting, Gold saw a range of Rs. 30,075 to Rs. 30,155. Gold is now expected to move within 1580$- 1640$ and any movement beyond this range will bring about great volatility. Though gold reduced in dollar terms, rates in Indian market remained more or less the same because rupee appreciated against the dollar to a tune above 56.20. Ratings agency Fitch, meanwhile, lowered its outlook on India to negative from stable.

Moreover, demand remains soft in India due to the lack of auspicious buying periods over the next few months. For June, the Bombay Bullion Associations expects gold imports to fall to 20-25 tonnes from 55-60 tonne in the same month of last year due to high gold prices in the rupee.

The government has not intervened much to contain the rupee appreciation. Hence gold is expected to lie at these levels.