Sovereign Gold Bonds (SGBs) are bonds issued by the RBI and are linked to the market price of gold. The first issue was from Nov-2015 and there have been 40+ issues since then. This is a relatively new market which most of the retail investors are just getting to know. If you haven’t heard about it yet, here are some key features.
· Quantity: Each unit corresponds to 1 g of pure gold
· Interest Rate: 2.5% paid semi-annually (This is over and above the gold rate)
· Timeline: 8 years but can be exited from the 5th year.
· Secondary Market: Exists, but has extremely low liquidity
· Tax: If redeemed after 5 years, no taxes apply.
All said and done, the decision to buy SGB rests on 2 important questions.
Do you want to invest in gold? Gold historically has been seen as a safe haven, meaning in times of economic turmoil, people turn towards buying gold as a store of wealth (Some other currencies including the Japanese Yen, and now the Australian dollar share the privilege- we cover more on that in our piece here). This increased demand moves the price upward driving returns for the people holding it. If you’re bearish on the market, SGBs may serve as a good investment, with the benefit of the gold price movement, an added 2.5% interest, and the tax bonus.
Are you okay with the low liquidity? In the absence of a strong secondary market and a steep secondary market discount, the only way for the SGBs to make sense for you is if you’re parking the money that you don’t want to touch for the next few years.
Now that we’ve covered the basics of SGBs, let’s dig deeper on the macroeconomics of why this was started 5 years ago. As you would know, India’s biggest imports are oil, gold, and electronics.
Quoting ex-Finance Minister P. Chidambaram “India does not produce an ounce of gold. You pay in rupee, but the government has to spend dollars to buy gold.” The gold craze started hitting the current account deficit, and the dollars we were paying for gold were becoming costlier. Also, China with its worldwide mining operations was becoming a huge exporter of gold. In the short-term India decided to tax gold import at a record 10%, which managed to hold the dam.
For a longer play, India decided to go the ‘Atmanirbhar’ route by energizing the domestic gold market. They had 2 schemes tackling both the supply and demand side of this precious metal as below.
1. Supply Side: Gold Monetization: Indian housewives hold more gold than the reserves of the USA, IMF, Switzerland, and Germany put together. So the government decided to pay interest to people who deposited gold in banks in this scheme.
2. Demand Side: Sovereign Gold Bonds: This is for people who want to invest in gold, but don’t mind having it digitally without a chance to touch the metal. They even gave a 2.5% interest (better to pay us extra than to buy gold at ever-increasing dollar rates)
Did these help in reducing the imports? It did, for a couple of years but we bounced right back up. It is tough to keep us Indians away from our one true love after all!
Now that gold is atmanirbhar, shouldn’t you be too? Don’t rely on random stock tips to make important investing decisions. Understand the businesses you want to invest in with GSN Invest++ Sign up today!