[Economy] Gold Exchange Traded Funds (ETF), Gold Deposit scheme, Elasticity of Demand explained
Gold deposit scheme (1999)
How does Gold ETF work?
- In case of Gold ETF, the authorized participant will give GOLD instead of shares to that Asset Management company. (AMC)
- Then AMC will give “Creation units” to that Authorized participant. Each creation unit contains set of ETFs (5,10,50,1000 whatever).
- But 1 unit of ETF = 1 gm gold.
- Then such gold ETF is traded @stock exchange.
- 2006: SEBI allowed Gold ETF schemes.
- Examples of gold ETF= UTI gold ETF, SBI gold ETF, Kotak Gold ETF etc.
Gold ETF: Pros
- When you invest in Gold ETF, the gold is virtually saved in your DEMAT account = no tension of theft / robbery. And you don’t have to pay wealth tax on it.
- Gold ETF is pure in quality. No tension of cheating from jeweler.
- If you buy gold jewelry as “investment” and during emergency you want to sell it, you may not find the buyer quickly (or the jeweler may try to rip you off by giving lower price given you desperation for money.)
- But in case of Gold ETF, you can sell it quickly, no questions asked, as long as stock market is open. You can even do it online.
Gold ETF: Cons
- To purchase Gold-ETF, you (small investor) have to pay Commission to the share broker. Although the brokerage on Gold-EFT is less than the Commission charged by conventional mutual funds (MF).
- You need DEMAT account to purchase Gold ETF. And to open DEMAT account, you need to pay regular fees + need PAN card.
- To get maximum profit in Gold-EFT, You need working knowledge of share market.
- In Gold ETF, you never get possession of actual / physical yellow colored
gold. What you get is just virtual gold / piece of paper, that can be traded in share-market.
- Given these reasons, Gold ETF = doesn’t attract investors from small towns and villages. (lack of awareness, fear of unknown etc.)
- Therefore, gold ETF hasn’t been able to drastically reduce gold consumption in India.
Linking Gold ETF with Gold Deposit Scheme (2013)
- So far we know that
- in Gold ETF, the mutual fund (asset Management company / AMC) gets possession of gold.
- in case of gold deposit scheme (1999), you deposit your gold to bank, bank sells/lends it to jeweler. You earn interest and at the end of maturity, you can claim you gold back (but in different form e.g. instead of jewelry, bank will give you gold-bar).
- Under this “linking” scheme, the Mutual funds are allowed to deposit their gold (under Gold EFT) to the banks (under Gold deposit scheme).
- Thus, gold held by Mutual funds will come back in ‘circulation’, and our jewelers can use it=it’ll reduce the gold imports of gems / jewelry industry= less trade deficit = less current account deficit.
Gold deposit scheme (2013)
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there is 1 more gold investment option called e-gold
here is some info regarding it
• another purchase option, involving investments in units traded on the National Spot Exchange (NSEL)
• e-Gold’s brokerage and transaction charges are lower than gold ETFs as there are no fund management charges
• One can take delivery of gold or sell it in the exchange.
Under e-Gold, one has to hold the yellow metal for 36 months to enjoy long-term capital gain benefits,Source: mrunal.org