More agitation to induce Indians to surrender their gold -- and their security - apr - 4, 2005
Dear Crowne Gold Clients;
Ways to Liquefy Gold --
The 'Financialisation' of Gold
and Real Estate is Important
By Gautam Chikermane
Indian Express, New Delhi
Monday, April 4, 2005
Among real assets of any statistical significance, gold and real
estate have a lot of similarities. Both are difficult to track
accurately -- non-reporting of gold imports and under-reporting of
real estate deals turn any tracking machinery off track.
Both are the end products, if not the key drivers, of black money --
while a large chunk of gold purchases is not reported, up to half
the real estate deals are unaccounted for.
Both are widely held as assets by households -- from gold bangles
and cups for infants to the fruition of a lifelong dream house.
Both are what economists classify as "unproductive assets" -- that
is, assets that can't be leveraged the way financial assets can.
And both are slated to change.
As far back as May 2002, Benchmark Mutual Fund had proposed a gold
ETF (exchange-traded fund). According to this financial innovation,
each unit of the gold ETF was to represent one gram of gold and was
to be listed and traded on the National Stock Exchange. As the
proposal still lies in limbo with Sebi, September 2002 saw Gold
Bullion along with World Gold Council (WGC) launch the first gold
ETF on the Australian Stock Exchange. Here, one unit of the gold ETF
tracks the price of one-tenth of a troy ounce. This model was
replicated in the UK when it listed on the London Stock Exchange in
December 2003 and then across the Atlantic in November 2004 when
Street Tracks launched its ETF on the New York Stock Exchange.
On the real estate side, in November 2002 the Association of Mutual
Funds in India submitted a report to "formulate a working plan
for launching of real estate investment schemes." The report takes
into account experiences of such schemes in the US and the UK,
modifies them to suit Indian conditions, and offers recommendations
on how to go about it.
Its structure: Based on the US model of real estate investment
trusts, not the pooled managed vehicles of the UK. Its scheme
characteristics: three-year tenure with its net asset value being
calculated quarterly. Its investment universe: mortgage-backed
securities, property financing, securities of companies in the real
estate business. This report too has been gathering dust.
Even as policymakers and industry have focused on advancing
the "modern" financial sector, the investment preference of
households continues in physical assets like real estate and gold.
(Simplistically speaking, physical assets are "things" that generate
income or wealth, like the mines that Tata Steel owns; financial
assets are pieces of paper or a series of electronic numbers, like a
share of Tata Steel that entitles the owner to a "claim" on a
According to the Reserve Bank of India, physical assets comprise
12.3 percent of GDP. That's about 2 percentage points more than
financial assets (savings bank accounts, bonds, funds, stocks). And
this is not factoring in their significant unaccounted component.
Institutional changes over the past decade or so have turned
financial assets from paper into electronic form, like the
dematerialisation of shares. Now it's the turn of physical or
"real" assets to turn financial.
Why is the "financialisation" of gold and real estate important?
At the household level, it allows individuals with small investible
sums to get an exposure to these two asset classes. While gold is
easy to buy and is highly liquid (second only to stocks), ensuring
its authenticity is virtually impossible and storing it is risky.
Real estate is not only one of the most illiquid investments but one
that is loaded against a small investor in terms of very high ticket
sizes and transaction costs, and its complex legality. Getting
access to both these asset classes, in small Rs 100 sized units (as
Chidambaram proposed in Budget 2005 for gold ETFs), would allow
households to diversify into an inflation-hedging instrument (gold)
and a medium- to high-growth instrument (real estate), without the
ills that accompany the underlying assets.
At a macro-level, these two finacial products could help bring
unaccounted money into the economy and turn unproductive assets
productive. A unit of gold ETF, for instance, could be lent to
traders at a marginal interest rate (around 50 basis points) and
allow for a marginally higher return for investors compared to its
lying in some underground vault.
The numbers are huge. According to the World Gold Council, Indian
individuals hold about 15,000 tonnes of gold (7 percent of global
stocks) worth around Rs 950,000 crore; they buy Rs 40,000 crore of
gold jewellery and investments every year. Though no data is
available, I suspect the numbers for real estate would be a multiple
Everyone benefits: households, industry, government (through
taxation). About time Sebi translated these proposals into products.
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