Tuesday, April 19, 2011

New In India: A Gold Account That's A Vertiable Gold Bank

Restoration of a gold standard, even as an unofficial para-money, requires two things: gold being used as both money and credit. Despite current unpopularity, the digital infrastructure for using gold as money is set up. Goldmoney, for example, allows payment to be made in gold.

Now, an Indian firm called RiddhiSiddhi Bullions Ltd. (RSBL) allows its high net-worth customers not only to buy gold but also to lend their holdings out. That service allows gold to be lent, and borrowed.
According to RSBL, ‘Bullion Plus Plus’ will involve a hassle free process of buying pure gold and silver from RSBL at wholesale market prices quoted on RSBL Spot. Also, the storage will be in secured vaults (LBMA accredited) and will be insured - an added advantage to the investors. Additionally, if the investor wants to put the gold or silver to actual use – like jewelry or utensils, he/she may withdraw his/her holdings at any time.

The investors will have to purchase gold or silver from RSBL and the same will be transferred to the vault. The investors will appoint RSBL Commodities Pvt Ltd, an RSBL Group company, to act on their behalf and lend gold and silver to third parties against adequate security. Investors’ risks are only limited to the extent of any price depreciation in gold or silver.

RSBL Commodities will act as the management company for the investors and charge a nominal management fee. RSBL Commodities will lend the gold and silver to various professional bullion market participants against adequate security and after thorough know your customer (KYC). The borrower will pay a certain lending income to RSBL Commodities Pvt Ltd, and the income thereof will be passed to the investors as stipulated.

On the face of it, this account doesn't look like much of an innovation. The loans made will likely be to mining companies looking to sell their gold forward, for which there's already an active gold market. Until now, bullion banks have been supplying the gold for these loans.

It is, though, the crossing of a threshold. Back in the aulden days, a lot of banks stuck to short-term commercial credit. Loaning long-term was seen as both risky and inappropriate, and consumer loans were anathema. Mortgages were left to building-and-loan societies (trust companies in Canada.) Long-term loans were left to the bond market.

So, this innovation represents the first steps to an all-out gold bank catering to high-net-worth individual depositors. In a way, it's fitting that India would be at the forefront of pushing gold into the money-and-credit system.

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