Sovereign gold bond scheme is a winner

A new era in bullion banking has just begun. In a bid to mobilise India’s vast but dormant private gold holdings, the government has unleashed three major programmes. PM Narendra Modi has launched the three ambitious gold programmes — Gold monetisation Scheme, Gold Bond and India gold coin. 

The core objective behind this multi-pronged strategy is to develop paper gold products that could eventually lead to reduction in gold imports and help save precious foreign exchange. According to market pundits, India has approximately 20,000 tonnes of gold valued at $280 billion. 

The maiden Gold bond 2015, will have estimated size of 50 tonnes of gold valued at around Rs 13,000 crore at current valuation. Government has fixed issue price of gold at Rs 2,684 per gram. This issue price would be changed on every week and it would be derived from the RBI reference rate and LBMA NCDEX spot rate. Bond will have sovereign guarantee and offer 2.75 interest rate. 

Tenure of the bond will be eight  years and redemption is linked to gold prices and would be volumetric- gramage based. Redemption return would be taxable and treated similar to physical gold investments.

The bond will have sovereign guaranty of  the government of India and offered by the RBI, and distributed by the post office and other channels. Bonds are denominated in grams and subject to maximum investment of 500 gram per year per person. The issue that began on November 5, will close on November 20, 2015. The government would issue approximately 50 tonnes worth of bond and would not hedge the market risk. If  the government hedge this exposure, cost may make it unviable. 

Because of taboo towards taxable products, initially this product may face reluctance. However, in the long run it may drastically change gold investing and gold ownership patterns. The most appealing part of the gold bond scheme is its interest income and storage security solution.

Physical gold has conventional security risk like theft or robbery. Paper gold is having demat gold and is electronic in nature. Physical gold is a dead asset. It does not earn any direct income. Gold bond earns 2.75 per cent interest income. The tax treatment is same, hence 2.75 per cent annualised interest return and that too is linked to gram of gold and linked with gold prices. 

Until now investors had very few options to participate in the gold market i.e. gold exchange traded funds(ETF) and gold mutual funds. Both products have inbuilt hidden costs and liquidity issues. In the case of gold ETF, no interest or dividend is offered. 

Return is market-linked and usually underperforming to gold prices due to management fees. With advent of the gold bond, gold ETF would lose its appeal. 

Physical gold investing    Gold bond investment       

No direct return. Capital Earns 2.75 % interest.  Returns taxable 
application is taxable    as per physical gold       
Encashable liquid investment.   Funds are technically blocked for eight years.    
Material ownership gives unique  Trading in secondary market greatly reduces
sense of security. Truly a safe   liquidity paradox
haven and disaster risk hedge
Only available parking centre    Purity, safety and legitimacy advantage- 
for unaccounted money    more friendly collateral benefits   
Investor exposure to market risk    Investor exposed to market risk, but interest
    payment is an additional buffer and cushion

Timeline

1998
Dec 31: Gold Metal Loan Scheme launched
1999
Nov 15: Gold deposit Scheme launched
2015
Feb 28: Arun Jaitley proposes Gold Monetisation and Gold Bond Scheme in Budget 2015-16 
May 20: FinMin invites suggestions for the draft of Gold Monetisation Scheme
Jun 19: FinMin invites suggestions for the draft of Sovereign Gold Bond Scheme
Sep 15: FinMin comes up with the office memorandum
Oct 22: RBI issues Master Directions circular to SCBs for monetisation scheme
Nov 5:  Issue of applications begins for the bond. It will be accepted till November 20.

PM Modi launches Gold Monetisation Scheme along with India's first gold coin
Nov 26: Bonds will be issued



(Biren Vakil is the CEO of Paradigm Commodity Advisors.)