The history of gold-deposit schemes does not bode well for Turkey’s planners. India, another country that last year experienced a depreciating currency and a rising domestic gold price, launched a gold-deposit bond scheme in 1999 through its largest commercial bank, the State Bank of India. It was not a roaring success, but that didn’t stop the SBI from relaunching the scheme in 2009.
Neither version of the gold-bond scheme managed to prevent India’s gold imports from rising dramatically in recent years, with all the attendant effects on the exchange rate and balance of payments.
So Indian policymakers have changed tactics. This week, they moved to limit gold’s value as collateral, with the central bank imposing a cap on the loan-to-value ratio gold-financing companies can offer. Reducing the financial utility of owning gold may not have been the primary motivation for this move, but it is a side effect that is unlikely to worry authorities.
What most definitely is designed to curb gold demand is last week’s announcement that India is doubling gold import duties for the second time this year, which sparked a strike by Indian gold dealers. Finance Minister Pranab Mukherjee specifically cited gold imports as “one of the primary drivers of the current-account deficit” and a major cause of rupee weakness.
As MineWeb reports, one side effect of last week’s move is the possibility that imports of jewelry routed through Thailand could now end up cheaper than those produced in India, since a free-trade agreement between the two countries means that imports from Thailand are currently subject to a much lower duty.
Domestic gold-jewelry makers are understandably upset. This may well be an unintended side effect rather than a deliberate policy and one that the government may well iron out. The structure of gold import duties now seems designed to give an edge to the domestic refining industry, with unrefined gold being subject to a lower duty than refined. It would seem perverse, therefore, to allow a situation to persist whereiny domestic jewelers lose out while gold imports are barely stemmed.
Another country with direct experience in gold deposit accounts is Vietnam, which in recent years has also suffered from currency weakness and a current-account deficit.
Vietnam’s central bank is something of a pioneer when it comes to domestic gold market regulation. Last May saw the State Bank of Vietnam ban gold-lending activities, at that time the latest in a series of interventions in the gold market.
What happened next is interesting. Authorities issued a decree to the effect that refiners of gold bullion should have a minimum of VND500 billion registered capital, as well as a domestic market share of at least 25%.
They must have known that the market was dominated by a single refiner, Saigon Jewelry Co., whose market share was around 90%.
Having handed Saigon Jewelry a monopoly, the SBV announced in November that it had “administratively acquired” the refiner. Then a rather odd thing happened. The SBV’s former governor, Cao Sy Kiem, said that the central bank should issue gold certificates as a way of mobilizing privately hoarded bullion.
In January of this year, current SBV governor Nguyen Van Binh also spoke of “mobilizing” gold for the “socioeconomic development” of the country, suggesting a role for credit institutions suspiciously similar to the one they were performing before the SBV shut them down.