Gold Glittering Again, But Gold Bonds are Better
Famous economist John Maynard Keynes described gold as ‘the arrogant yellow metal’ and a ‘barbaric relic.’ Indians, however, do not subscribe to the views of Keynes. For them, gold is a status symbol, a necessity and definitely not a luxury. The social custom prevailing in India has made gold an unavoidable asset even for those who are not psychologically inclined to it. Gold prices have again started moving up after negative returns for three years. Investors in gold can now look at a better option than physical gold – Sovereign Gold Bonds (SGBs). SGBs are securities denominated in grams of gold, issued by the RBI, on behalf of the Government of India. They are substitutes to physical gold. Investors have to pay in rupees and the bonds are redeemed in rupees on maturity.
Bonds are issued in denominations of 1 gram of gold. Minimum investment is 2 grams. Only investment of up to 500 grams per person is permitted in one financial year. Indian residents, HUFs, trusts, charitable institutions etc. are eligible to invest. Bonds are issued at the prevailing gold price. The first tranche of SGBs was opened for subscription in November 2015. The first issue price was Rs. 2684 per gram.
Why gold bonds?
The decision to issue gold bonds was taken since gold imports into India became a major problem for the economy. Since gold is imported, it is a major drain on foreign exchange; it widens the trade deficit and depreciates the currency. So the economy gains when the demand for physical gold declines.
Gold bonds have many advantages over physical gold, particularly gold in the form of jewellery. There is no risk associated with storage, no cost in the form of making charges for jewellery and purity issues. More importantly, the gold bonds yield interest of 2.75 per cent payable semi-annually. The bonds will be redeemed in cash on the eighth year at the price prevailing at that point of time. There are exit options in the 5th, 6th and 7th years. Investors who want to exit earlier than that can sell through the stock exchanges where they are listed. Gold bonds started trading on the National Stock Exchange on June 14, 2016. As gold prices have appreciated since the issue of SGBs, the price of bonds has also gone up. Gold bonds can be used as collateral for loans.
Bonds are sold through scheduled commercial banks, SHCIL offices and designated post offices. Investors can apply online through the website of listed scheduled commercial banks. Know-Your-Customer (KYC) norms will be the same as in the case of purchase of physical form of gold. Identification documents such as Aadhar card/PAN or TAN/Passport/Voter ID card will be required. KYC will be done by the issuing banks/SHCIL offices/post offices/agents. No separate KYC will be needed for bank’s own customers.
Parents in India buy gold for their daughters even when they are young, planning in advance for their wedding. SGBs are a much superior option.
(The author is Investment Strategist, Geojit BNP Paribas)