The new gold bond scheme is an attractive option for investors. But given the sagging gold investment demand in the country, it is doubtful if many investors will fall for this bait.
Investment demand for gold makes up around 30-35 per cent of the total gold demand in the country with consumption — that comes from the insatiable appetite for gold jewellery — accounting for the lion’s share. Gold prices have been in bear territory for more than three years, one reason why investment demand has been subdued.
The World Gold Council has reported that demand for gold bars/coins in India in April-June this year was down 30 per cent compared to 2014. The holding of gold ETFs, the other route to investing in non-physical gold, has also declined. While part of this contraction is due to the import restrictions, investors have also been averse to investing in an asset whose price has declined 35 per cent (in dollar terms) over the last three years.
The gold bond scheme will, however, be a good substitute for gold ETFs. Returns of this bond will track international gold prices very closely; it also has a sovereign guarantee. Even in times of a mild underperformance in gold prices, investors can make some returns, as there is a coupon payment in the bond.
The interest on the gold bonds may be about 2-3 per cent (linked to the international rate for gold borrowing) which would be calculated on the weight of gold. This instrument will be traded on commodity exchanges and allowed as collateral for loans. Gains will be taxed in a manner similar to physical gold.
The only limitation is that maximum investment will be capped at 500 grams a person annually. Investors of gold coins may also shift to these bonds as it does away with the need for bank lockers.
But the success of this scheme will depend upon improvement in gold prices. Until then, investors may shrug aside this instrument too.
Chief Research Analyst