Market Commentary 02 Aug 2017
The Indian government has announced the launch of the Sovereign Gold Bond scheme which will be available soon in the market.
Essentially the bonds will be issued by the Reserve Bank of India (RBI) on behalf of the Government of India in denominations of 5, 10, 50 and 100 grams of gold.
You can buy into the scheme if you are a resident Indian, but there is an investment cap of 500 grams.
"The period of these bonds will be a minimum of five to seven years so that the customers can be saved from the volatility of the prices of the gold prices," Finance Minister Arun Jaitley explained while announcing the scheme.
Like physical gold, you will have the option to pledge your bonds to avail loans at the 75% loan-to-value ratio offered on normal gold loans.
Know Your Customer (KYC) norms for the scheme will be similar to those already in place for the purchase of physical gold. So, if you purchase bonds valued at more than Rs 50,000, you will have to fulfill KYC criteria, producing either your PAN card or Aadhaar card.
Banks, Non-Banking finance Companies, Post Offices and National Saving Certificate (NSC) agents will be among the government-authorised agencies allowed to issue and redeem the bonds. This should make subscribing to the bonds an easy affair.
During redemption, "the price of gold may be taken from the reference rate, as decided, and the Rupee equivalent amount may be converted at the RBI Reference rate on issue and redemption".
The big advantages you as a consumer will be the fact that you won't have to pay any transaction costs on these gold bonds you What follows makes the scheme even more attractive.
At the time of redemption, you will pocket not just the price of gold prevailing (at the RBI reference rate) in rupees, but you will also be paid additional interest - "in gold terms" (tied to the prevailing price of gold) at a rate that is fixed or floating, as decided by the government.
This means that if prices soar, you stand to make a neat windfall on your investment. If, on the other hand, prices go down, your losses will be cushioned to some extent by the interest gained.
There is also an added incentive to consider. In case gold prices fall drastically when redemption time approaches, you will also have the option "to roll over the bond for three or more years".
Since these bonds are issued by the RBI on behalf of the government, they are backed by the Indian government.
The government plans to offer indexation benefits too on early redemption, which investors can opt for by transferring their Gold Bonds to another investor. Redemptions at the end of the tenure, meanwhile, are set to be allowed to slip out of the long-term capital gains tax net in the next budget, according to the scheme document. As the product is not back by physical gold, before investing do consult your investment advisor to understand the risks associated with it.