As the world watches India move to monetize the vast gold holdings of its citizens, many gold buyers and investors in gold are watching to see the impact of the move.

It is a common fact among gold buyers and traders that India has long been one of the world’s greatest consumers of gold, importing nearly 1,000 tons each year, second only to oil imports. Contrary to many importers, this large rate of consumption is not to meet industrial demands, but rather the desires of individual Indians to own and hoard gold.

A Unique Problem, A Questionable Solution

In fact, it is estimated by the World Gold Council that Indians privately own a stunning 22,000 tons of this precious metal, an amount exceeding $1 trillion U.S. in market value. Many large hoards are held by temples; one temple disclosed in 2011 that its storerooms held more than $22 billion of gold.

The realities of this wealth are not a positive for the economy, as far as many Indian government officials and economists are concerned. The repositories of wealth do very little to aid in economic growth and are not available for investment.

However, Prime Minister Narendra Modi has led the effort to change the status of this enormous undeployed capital. The goal is to have the temples and other owners deposit their gold and earn interest on it. Those who do so will either get gold-backed bonds or participate in the Gold Monetization Scheme, essentially a form of bank deposits.

The sovereign gold bonds announced as part of the plan are available only to resident Indians, and will be issued in denominations of 5, 10, 50 and 100 grams, earning interest, at either floating or a fixed rate.

The deposited gold would be melted down and sold off, mainly to jewelers and other consumers. The government and its advisors see this step as an important initiative to protect its foreign reserves and solve the current trade imbalance.

This movement has stirred a great deal of debate in India. Traditionalists and many religious figures see the gold as having a spiritual significance that would be lost if it was transferred from the temples and melted down. On the other hand, many younger Indians see the potential value to the country’s economic success as a reason for supporting the effort.

Potential Impact on the World Gold Market

Observers are watching this move closely while trying to determine its impact on gold supply and prices. There are several unknowns that will ultimately determine the amount of gold taken from temples and put on deposit. That amount would drive down demand for imports from jewelers who will receive financing from the Indian government to by the newly available bullion.

Also, the interest rate paid could garner sufficient interest to overcome skepticism and religious objections. As a final internal issue, it is still not clear how the banks involved will be allowed to carry the gold on their books, affecting the amount of capital released.

Since the concept is now law, the next few months will be important to gauge the ultimate impact of this innovative approach to gold holdings.

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