Sovereign gold bond yields better than spot metal investments

Sovereign gold bond yields better than spot metal investments
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Data from the RBI shows that investors bought bonds at a varied price range of Rs 2,600 per gram in January 2016 to Rs 3,214 per gram, which was issued last month.
Investors who bought sovereign gold bonds instead of the precious metal have turned out to be better off as gold prices have risen supported with the 2per cent interest on these bonds. Investors can exit the first bond issued in November 2015 after it completes five years in 2020.

Indians have bought a total of Rs 7,176.49 crore of gold bonds in 26 tranches in the three and a half years since the Reserve Bank of India (RBI) issued the first such bonds in November 2015.

Data from the RBI shows that investors bought bonds at a varied price range of Rs 2,600 per gram in January 2016 to Rs 3,214 per gram, which was issued last month.

However, in absolute terms, the value of these bonds is small compared to the amount of gold held by RBI. “These bonds have not been a hit because a lot of charitable trusts and other large buyers stayed away initially. Also, though there was no GST and no capital gains, the interest earned on these instruments was still taxed, which dissuaded some buyers,” said Surendra Mehta, national secretary, India Bullion and Jewellers Association.

Since the first issue, international gold prices have increased to around Rs 34,000 per 10 grams from Rs 25,000 per 10 grams in November 2015. However, the total amount issued is a fraction of the gold held by the central bank.

Meanwhile, RBI has also slowly built its gold holdings in the last year or so as it fortifies its reserves to deal with the maturity of these bonds. RBI’s total gold holding has increased by about 43 tonnes to 600 tonnes in December 2018 from 557 tonnes in November 2017. “RBI has been adding to its gold reserves but that is normal course for a central bank as part of its investments or diversification. The total gold reserves RBI has is more than enough to back up gold bond maturities,” said Saugata Bhattacharya, chief economist at Axis BankNSE -0.19 %.

However, some say the gold bond experiment has worked to create an alternative away from holding physical gold, which was the main aim of the government.

“Though the total quantity sold is not that big, at least 1 million people have bought these bonds, making it an alternative investment instrument. This is a big step forward considering that the mutual fund industry took more than a decade to build that large a base,” said Shekhar Bhandari, vice-president, precious metals at Kotak Mahindra Bank.So far this fiscal, five series of these bonds were issued while in the last fiscal, 14 such issues went public.

[“source=economictimes.indiatimes”]