Saturday, March 21, 2009

SBI Gold Deposit Scheme

SBI has launched a Gold Deposit scheme to make use of privately held stock of gold and reduce country's dependence on imported gold. This scheme was earlier launched in 1999 but wasn't successful then. But we think this would be a good time for a bank to make use of high gold prices and thus would make a lot of sense now.

The scheme invites investors to deposit their surplus gold, in any form, with the bank and earn interest on the same.The minimum amount of gold deposit is pegged at 500 grams (1/2 kg), which is probably beyond the reach of general public at large but for high networth individuals, temples and trusts, this would be a great investment opportunity. The gold which was lying idle in locker of a bank can now earn them interest.

The gold so deposited with the bank shall be checked for purity and melted at the Government of India mint. A certificate of purity will then be issued by the Government, which can be used by the investor to claim back the gold after the maturity period. The bank has also clarified that the expenses incurred on assaying of gold shall be borne by the bank and will not be passed on to the customer.During the investment tenure, the deposited gold will earn an interest, which is currently tagged as 1% (3 years), 1.25% (4 years) and 1.5% (5 years). The investment shall be locked-in for one year.

Premature withdrawal, after the lock-in period but before the maturity, shall attract a penal interest of 0.5% if withdrawn within 3 years and 0.25% thereafter.However, unlike the regular deposits, interest here is calculated in grams and not in rupees. Thus, an investment of 500 grams of gold for three years shall earn 5 grams of gold as interest per annum, compounded annually. At the end of the maturity term, the interest so earned shall be converted into rupee equivalent of gold then and paid to the investor. For the principal investment, investor will have an option to claim back pure gold (0.999 purity) or cash equivalent of gold as on that day. The scheme is also attractive from tax perspective as the interest earned as well as tax on any capital gains arising from rise in price of gold after maturity is exempt from tax. Gold so deposited has also been exempted from wealth tax.

For small individual investors, this is out of reach. However, investment in Gold (though not in form of jewellery) will make a lot of sense in 2009 and would fetch good return in a 6 months to 1 year time frame. Reason for that is simple - countries will try to devalue their currencies to be more competitive globally so no investor or bank would have faith in the forex of any country in the short term to medium term. Gold is the best asset class to hedge against that scenario. So, Gold prices are bound to go up in 2009. However, small investors should either buy gold coins which they can easily sell or they can invest in Gold ETFs (Exchange traded funds). The gold prices are currently at Rs 15000/-. Sell them when the prices reach 18000/-. That would be 20% return on investment within 6 months. Not a bad deal at all!

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