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Jan 25, 2013, 03.01 PM IST | Source: CNBC-TV18

See gold ETFs earn interest post import hike: Goldman Sachs

In an interview to CNBC-TV18, Sanjiv Shah, executive director, Goldman Sachs AMC gives his views and expectations of the gold import hike from 4% to 6%.

In an interview to CNBC-TV18, Sanjiv Shah, executive director, Goldman Sachs AMC gives his views and expectations of the gold import hike from 4% to 6%.

Shah opines the move by the Government, in order to check its wide current accound deficit (CAD), is positive for the market. "If the scheme really works well, then the gold which is basically lying with the ETFs can be monetised and can be used in terms of lending it out to jewellers," he says.

Shah says gold ETFs can now earn interests. "This whole process will help in terms of reduction of imports at that point in time where in we give the gold to the bank. The bank will there onward lend to the jeweller. It’s a very positive step in terms of the imports. The benefit to the gold ETFs is that we will start earning some interest. So, the fund itself will start earning some interest," he adds.

Below is the edited transcript of Shah's interview to CNBC-TV18.

Q: What do you think will be the impact on gold itself? Do you think we are going to see any reduction in gold imports because of this?

A: If the scheme really works well, then the gold, which is basically lying with the ETFs can be monetised and can be used in terms of lending it out to jewellers. That, hopefully will over a period of time reduce imports of gold.

Q: Why don’t you start by explaining how exactly it will work? We are at the moment awaiting directions from Sebi on how this scheme will work. A gold ETF with say 50 tonnes of gold. How much gold can it deposit? What exactly are you expecting from the bank because we have not heard too much by way of gold deposit schemes either? What will be the announcements that the various entities will have to make and how will it work?

A: Firstly, we will have to get some direction from Sebi as to how much we can actually lend out. That I presume will come in the next few weeks. But assuming hypothetically we can lend out X amount of gold, let’s say 20-25% and assume that the gold with the ETFs today is about 40 tonne and growing every year. Say you can lend out 10 tonnes, each tonne is about Rs 300 crore today.

If really Rs 3,000 crore of gold can be lent out to the banking system, the banks can then lend it out to the jewellers who typically borrow against rupee and import gold for their own consumption.

This whole process will help in terms of reduction of imports at that point in time where in we give the gold to the bank as we understand. The bank will there onward lend to the jeweller. That leg will reduce the imports of gold to the tune of atleast 10 tonne. So, that could be the number to start off with. It’s a very positive step in terms of the imports. The benefit to the gold ETFs is that we will start earning some interest. So, the fund itself will start earning some interest.

Q: How much might that be?

A: I don’t know, but if you look at the numbers, then it could be anything between 0.5 percent to 3 percent. Now, it depends on the market conditions at every point in time, but any number is better than zero. So it’s always much positive for gold ETF investors.

Q: What sort of consumption trends have you seen till now with regards to consumption of gold? The import duty on gold has been hiked for the second time this year itself and is at around 6% and not to mention that gold prices have risen from 2004 to 2007 but that really hasn’t deterred consumption patterns. Give us a sense in terms of whether this will actually help in terms of deterring consumption of gold at all?

A: I really don’t have a view in terms of whether import duties will reduce the consumption of gold because consumption of gold has many factors. Obviously, cost of duty is one of them, but there are so many other factors again on the inflation, the world wide trends, etc. However, our hope is that the linking of the gold ETF and the gold deposit scheme will basically, atleast reduce the imports of whatever gold is lying with the gold ETFs. That, in turn will help the government. One might argue that the number is very small compared to what our imports are but you have to look at from the perspective that basically if more and more people buy gold ETFs instead of physical gold and if gold can be monetised, over a long period of time, we believe it’s a very positive step.

Q: What’s the difference in terms of how consumers utilise gold ETFs as of now vis-à-vis for consumption otherwise. And should one just buy physical gold or maybe use it for other purposes like jewellery, etc. What is the difference and how do you expect the mix to change going forward with this?

A: If you look at it, consumption in terms of jewellery is consumption. At the end of the day, people would want to have jewellery and they wear it and it’s something which will be consumed over a period of time. However, if you look at the numbers, typically India consumes about 800 tonnes of gold. The numbers could wary by about 5-10 percent. Out of that, the sense is that about 500-550 tonne of gold is consumption which is jewellery and about 200-250 tonne is basically for investment purposes. If that amount can be moved towards the whole gold ETF and also can be monetised over a period of time through the gold deposit scheme - that would really help in terms of decreasing imports and ensuring that gold is monetised in the country. But this is the first step. What we are talking here is not something which is going to happen overnight, but it is the first step and I hope that it actually lends itself to a much better environment in terms of reduction of imports.

Q: Is there any gold deposit scheme in the market now?

A: SBI and a few more banks have it. Right now, the maturity of those gold deposits schemes is nearly three years. So, that becomes an issue for most of the investors especially for gold ETFs, because we have to ensure that basically we are liquidated at all points in time. These changes especially in the maturity of only six months will help us ensure we can invest and we also have the ability to kind of redeem it at any point in time. So, those changes are going to be useful for us.

Q: So if I have gold now, I can go with maybe 10 grams of gold or a kilogram of gold or whatever is the minimum size and deposit and I get what - 3% for it?

A: Right now it is little less than 3% as I understand. The rates have gone up to 3% over a period of time.

Q: What is the normal cycle of these asset classes especially gold? Is it a ten year cycle?

A: It is very interesting because if you look at the cycles - they have varied over a period of time. The last cycle was in 1980 to nearly 2000. So, it was a 20 years down cycle. Before that, it was a ten year up cycle. Bretton Woods were broken up and then oil prices started rising. So, typically they are longer cycles. They are not shorter cycles especially in terms of gold.

Q: Any sort of consumption patterns that you are spotting going forward with regards to gold and especially in India?

A: Our thought is that Indians really buy gold not just because they consume gold in terms of social pressures and the social norms. Indians also buy gold because it is one way to basically invest in dollar. You have to take that into account. I am not talking about the so called black economy and the money which goes into it, but it’s a proxy for investment outside of India. It also bears on us as an industry, not just mutual funds but others to give products to Indians who can get assets which give them risk which is basically outside of India.

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