Tuesday, October 20, 2009

026 WHY BANKS AND DEALERS DO NOT BUY BACK GOLD?


I went to some banks and some gold shops today, to enquire about buying and selling of gold coins. A friend asked me to buy some gold coins on his behalf with his money and send him.

I enquired from the Banks' staff and shop salesmen, out of curiosity, whether they will buyback the gold coins they sell and if so at what rate. Everybody outrightly rejected the idea.

It may be true that Banks are forbidden from buying gold by some Reserve Bank of India guidelines. The Banks may be acting as Commission Agents (middlemen) when they sell gold to public. They do not undergo or undertake any risk when they do not trade on their own and maintain positions. The Banks are already dealing in shares and securities, sometimes on their own account in spite of the associated risk, and sometimes on behalf of their customers. Gold is a less riskier commodity, when compared to shares and stocks. The Banks may, on behalf of their reputed gold dealers, undertake buying gold from public and earn some commission in the process.

Market-making involves a two-sided activity, i.e. a market-maker has both to buy and sell. He charges his profit on both legs. The market-maker need not maintain positions or speculate. It will be sufficient that he keeps his total purchases and sales on everyday nearly equal. This type of cover operations, Authorised Dealers in Foreign Exchange do every day and Reserve Bank of India has some guidelines. Similar guidelines mutatis mutandis may be issued to Banks, when they handle gold.

Traditional gold buying was for ceremonial purposes like weddings. Indians are on a gold buying spree today, to protect themselves against erosion of Indian Rupee. A person, who keeps his money in Banks, at very low rates of interest, becomes a fool. The Prime Minister and the Finance Minister consider that interest rates in India are still high and they needs further pruning. The Heads of Banks do not agree, because they know the market realities. The Government wants to please the industrialists and the lobbying MPs. The Banks reluctantly yield to RBI guidelines.

The 1962 Finance Minister of India, Mr. Morarjee Desai, tried to mobilise gold from Indian public by issuing gold bonds, so as to use the gold for meeting foreign exchange payment needs. This type of foreign exchange stringency does not exist today, because India is sitting on piles of US Dollars received in the form of foreign investments, and the Central Bank of the country, finds it a headache to maintain the exchange reserves without erosion. Dollar has lost 11% of value during the last six months, according to market reports. Reserve Bank's policy of allowing liberal imports of gold, we may have to view, under this focus.

Indians importing gold, appears to be more prudent, when compared to importing liquors and luxuries. Such indulgence, which we normally see in the economies of the Gulf countries, is gradually seeping into Indian economy also.

The unwillingness of Corporate and big gold dealers in India, to buyback the gold coins minted by them/sold by them is not understandable. Do they sell gold coins of lesser purity?

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