No silver lining to gold bonds

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Non-acceptance of gold in the form of bonds has been an obstacle for the government to reduce the import of physical gold

Gold bonds don’t glitter as much as the government had thought they would. Acceptance of gold bonds in the country has been very low while the import of gold continues to increase.

The Sovereign Gold Bond Scheme (SGBS), launched in 2014, was to reduce the import of physical gold in the country. But since then, data from Statista shows that the import has risen by over 100 percent.

The reason behind the intention to reduce the import of physical gold was to reduce the Current Account Deficit (CAD), and to control the currency depreciation, said Venkataskrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP. “Since their inception in 2014, the performance of the bonds has not been going great. But it took a positive turn during the pandemic as people looked for a safe investment,” he said.

As of August 2022, investors bought gold bonds for an aggregate amount of Rs. 38,720 crores. Only 25 percent of the total aggregate investment came before the COVID-impacted years. The remaining 75 percent, around Rs. 29,040 crores, was the result of a need for safe investment during the pandemic as people could not buy physical gold and the equities were giving negative returns. Data on the mobilization of these bonds by Niti Aayog shows that from inception to July 2017, only 19 percent of the bonds were mobilized.

Investment analysts believe that investment in SGBS gives you a better return than the traditional form of investing in gold jewelry. Subhashree Samal, a Financial Data Analyst at a global market intelligence firm, said that the bonds provide an interest of 2.5 percent which is an extra income over the appreciation of gold price. She added that the SGBS offers tax benefits and she does not have to worry about the safety of the investment as it is backed by the Reserve Bank of India (RBI).

Increase in the import of physical gold by over 100 percent

But data and studies show that people show apathy toward the SGBS. A 2018 study done in Kerala shows that around 90 percent of the respondents have investments in physical gold only while none have investments exclusively in paper gold. It also shows that around 75 percent of the respondents lack awareness about SBGS.

Shivesh S, 21, who invested Rs. 41,410 (10 grams in one lot) in SGB one year ago, said, while looking for investment options in gold he found SGB to be the best option. “If I had black money I would have chosen physical gold to evade taxes, which I think is the reason for most people to choose physical gold. I preferred SGB as I had no goal of selling it anytime soon and it was tax-free, paid interest, and safe in my demat,” he said.

SGB are government securities that are denominated in grams of gold and are issued by the RBI in different tranches based on the prevailing market price. The minimum investment in the bond can be one gram and the maximum will be four kg for individuals and Hindu Undivided Families and 20 kg for trusts. The bonds bear an interest of 2.5 percent per annum on the initial investment. The bond has a tenor of eight years and can be sold in the secondary market after five years.

Even jewelry owners highlight the positive aspects of gold bonds over physical gold. K Ravindra Kumar, a jewelry businessman in Tamil Nadu, said that features like yearly interest, capital appreciation, crediting accountable money in the investor’s account, and pledging bonds for availing bank loans are features that gold bars do not have.

Ravindra Kumar said that people are not ready to buy gold in the form of bonds. “There has been no impact on  jewelry businesses because of the sale of gold bonds. People expect to get gold when they give cash. People have different emotions about the feeling of having physical gold with them, and even when we suggest investing in bonds they will not do so,” he said.

Eshwar K P, the owner of Ashoka Jewelry Works and a member of the Jewelry Association Bangalore, also said that jewelry businesses are not affected as people need to learn the full information of the scheme. “People are not aware of this scheme. No one understands its benefits and how it works” he said. “The markets are different as those who invest in physical gold and who invest in these schemes are different. People still believe that gold is auspicious so they buy them in physical form,” he added.

The jewelry traders said that if jewelry businesses had been an agent in issuing gold bonds, then there would have been a better takeoff. “Multiple times we requested to be given the task of being an agent to issue gold bonds, but it was rejected. By taking some commission, we could have encouraged people to buy bonds instead of physical gold,” added Ravindra Kumar. He also pointed out the advantage of using unaccounted money to buy physical gold. “Since most of them do not use accounted money to purchase gold, they cannot buy bonds issued by the RBI,” he said.

Despite the gold bonds giving a favorable investment option, the market is not picking up because of a lack of investor-friendly environments, said Mr. Srinivasan. “With high emotional attachment to physical gold, factors like less liquidity in the secondary market, the lower penetration of demat accounts, and the lack of incentive for other brokers are diminishing the growth potential of SGBS,” he said. He added that there must be some amendment to the lock-in period, to enable higher liquidity in the secondary market.

The increasing trend to buy gold bonds during the pandemic was the result of the need for a safe investment, which was compounded by the fact that people were not able to buy physical gold, said Mr. Srinivasan. “With Indian consumers buying physical gold for ornamental purposes, the post-pandemic trend of purchasing bonds will continue only when the market is marketed properly,” he said. He added that only when the bond is made more attractive through incentives and awareness, the government will be able to reduce the objective of reducing the import of physical gold.

The SBG series IV with the symbol ‘SGBOCT25IV’, which was issued in October 2017 gave an annualized return of 11 percent compound annual growth rate (CAGR). Simultaneously, gold Exchange-Traded Funds (ETFs) and digital gold gave an annual return of 11 – 12 percent CAGR and 13 – 15 percent CAGR respectively.