In India Gold is valued much more than a mere commodity, it appeals to the sentiments and traditions of the populace. This is reflected by the fact that India is one of the largest consumers of gold and our gold imports are to the tune of 800-1000 tonnes every year. In this year’s budget, the Finance minister laid special emphasis on Gold by introducing certain significant proposals with the objective of curbing the country’s burgeoning trade deficit.
Why Sovereign gold bonds is good for share market trader
One of these proposals is the introduction of a Sovereign Gold bond, an option for investors who are looking to make fresh purchases of physical metal gold. So, this provision intends to transform gold from a physical asset to an alternative financial asset. This proposal is basically targeted at capturing the ‘investment demand for gold’, that is, investors who purchase gold in the form of coins and bars. According to the government data, every year around 30-40% of the total gold imports is attributed to investment demand only.
FUNDAMENTALS OF A GOLD BOND
Essentially a Gold bond will work in the same manner as a typical bond instrument; it will carry a fixed rate of interest and be redeemable in cash equivalent of the value of gold at the time of redemption by the bondholder. It is expected that gold bonds would likely offer an interest rate of 1.5 – 2%. So, the biggest advantage is that a gold bond will provide an investor with an interest income along with capital appreciation which will reflect the price of gold.
The schematics of this proposal are yet to be disclosed. However, analysts & industry sources expect that gold bond scheme would be operated through designated banks and agencies only. An investor has to deposit cash with the designated bank to purchase a gold bond. The bank would not be required to buy equivalent gold but only offer the investor ‘gold-like’ returns, thus wiping out the need to import gold.
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PROS & CONS OF THE SCHEME
Gold bonds have an advantage over gold ETF’s because they do not require any fees to be paid to fund houses. Also, a bond will mimic the price of gold with no tracking error as compared to gold ETF. As compared to a physical investment in gold, purchasing a gold bond will do away with any safekeeping or locker charges.
However, the Sovereign gold bond scheme comes with its fair share of challenges. Due to the emotions and craze attached to gold, it will not be easy to convince people to consider gold as a paper investment. From an investor’s perspective, the points of concern would be regarding the ability to trade gold bonds easily in the market, liquidity and the tax implications. The Government should ensure adequate liquidity and maybe provide an indexation benefit to make it a lucrative investment.