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Here's how govt's investor charter will impact gold investments

Tue Feb 23 2021



Authored by Mahendra Luniya


Budget plays a vital role in accelerating the economic growth of any country and the general public in India had many expectations from the FY 2021-22 budget as it was supposed to be the “Big Budget” after numerous mini-budgets announced in the previous calendar year to deal with the economic contraction brought about by the pandemic.


Much to the satisfaction of the people, the budget has come as a boon for gold investors.


The pandemic had left the economy unstable and every instability adds value to gold as investors shift to safer options to park their funds.


The Federal Reserve Bank has been printing currency ever since the pandemic hit, to provide a cushion to the steep fall in economic activity and to revive it. The total printing of $3 trillion dollars has generated liquidity, which has helped the economy but eventually has fuelled the inflation cycle, giving the gold the opportunity to shine. This is because inflation reduces the net return earned by investors in various asset classes & gold has always acted as a hedge towards inflation.


In line with the steps taken by the central bank of US, the government in India has come up with better steps such as allocating more funds towards Capital and developmental expenditure. This would drastically increase the public expenditure resulting in stimulating liquidity. The quantum of increased liquidity also stimulates the overall percentage allocation to gold in portfolios.


One of the budget measures, related to provident fund investment works to favor the long-term gold bull run. The step is taken to tax interest earned above Rs 2, 50,000 will target the higher income groups and automatically divert their fund allocation to other investment options. Provident fund was viewed as a safe investment option and gold matches the same requirement as well as investors would prefer Sovereign Gold Bonds, Exchange-traded funds and other digital gold options for more liquidity.


The specific gold-related measures in the budget include that the Gold exchange will from now be regulated by the Securities Exchange Board of India (SEBI) which is a historic step taken by the government that will boost the trade-in exchange as it will increase the faith of investors and also attract new investors towards the yellow metal.


Moreover, it has been seen that in recent times the common people have started to understand the concept of investing better. For example, nowadays if people want to take insurance they prefer term insurance over other endowment options, similarly, people have now understood that if they want to wear jewelry then they prefer physical gold. They have understood that buying jewelry as an investment is not a good option when other options like Sovereign Gold Bonds (SBGs) are available.


The buyer ends up paying around 10 percent more money when buying gold physically which includes making charges, indirect taxes, etc. This is the reason that the recent series of SGBs and Gold ETFs have outperformed drastically. Thus the recent measure regarding Gold exchange, which from now will be regulated by SEBI, will support the idea of investment in Digital gold. This measure is also welcomed by the Sarafa Association.


The second measure taken in the budget is the proposed reduction in the rate of customs duty which was paid for importing the metal from 12.5 percent to 10 percent. This would lead to lower import costs which will be passed on as lower rates and that will also stimulate the buying mindset in customers. Also as the customs duty was very high earlier, it led to malpractices such as smuggling, increasing the black market of the commodity. But the reduced rates will prove to be an incentive to undertake imports from the legal route. This will result in transparency and accountability strengthening the faith of the customers.


The sharp rise that the commodity experienced in the recent past made it seem overvalued to the retail customers squeezing the demand. The measures in the budget will help revive the love for gold that people had earlier suppressed. Moreover, the wedding season will kick off soon increasing the immediate demand for the commodity.


Considering the factors that we have elaborated above and the steps taken by the government through the budget, it is conclusive that the yellow metal is set to shine brighter and the returns thus generated will heavily outperform other asset classes.