Gold control act and gold bonds

History and facts | Market Commentary 20 Feb 2018

Relation between gold control act and gold bond scheme

India's 1962 war with China severely depleted India's foreign reserves and removed the backing for the rupee. To prevent a massive flight of the rupee, the Government established the Gold Control Act in 1962. The original intended life of the Act was for three years, but it kept getting extended until 1971.

The 1962 Act recalled all gold loans given by banks, forbid private ownership of gold bullion, and banned forward trading in gold. The objective was to prevent the rise of an alternate currency if the rupee should flounder. In 1963, the production of gold jewellery above 14 carat fineness was banned.

Five years later, the Government enacted the Gold Control Act 1968, barring citizens from owning gold in the form of bars or coins, and mandated the conversion of all private gold bullion into gold jewellery. Goldsmiths were not allowed to own more than 100 grams of gold. Licensed dealers were not supposed to own more than 2 kilos, depending upon the number of goldsmiths they employed. Dealers couldn’t trade with each other either, effectively killing the official gold market.

In 1965, a gold bond scheme - the country’s first attempt at such a measure – was launched; buyers could expect tax immunity if this was part of their unaccounted wealth. But all these measures failed to realise their objectives. It was the first of several such schemes the Government introduced to regulate the gold market.

Gold Bond schemes were based on the idea of accepting a deposit of gold from customers and providing them with certificates (or bonds) for a fixed maturity and interest payment. On the first one issued in November 1962 – a 15-year Gold Bonds – interest was set at 6.5 per cent (November 1962).

Then came the 7 per cent Gold Bond 1980 Scheme (issued in March 1965), followed by the National Defence Gold Bonds 1980 (also issued in 1965). All these schemes had tenure of 15 years. In 1993, the government tried yet another Gold Bond Scheme. It is not clear that any of these schemes were successful in meeting their intended objective.

People’s faith in gold’s value – as a metal – did not falter.

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