Record demand for sovereign gold bonds despite price rise

The international gold spot price remained little changed, moving from $1,919 an ounce at June-end to $1,911 at present. (Bloomberg)
The international gold spot price remained little changed, moving from $1,919 an ounce at June-end to $1,911 at present. (Bloomberg)


Indians purchase 11.67 tonnes of gold bonds worth 6,900 crore to hedge against inflation

Investor demand for sovereign gold bonds (SGBs) surged to a record 11.67 tonnes valued at 6,914 crore in the second tranche of the current fiscal year despite high gold prices.

Rising global macro uncertainty and high retail price inflation back home, amid rising crude oil prices, are driving investor demand, according to a banker and a senior broking official.

The latest issuance on 20 September marked the first instance of demand growth exceeding 10% since the bonds were first sold in November 2015 in any tranche. After this sale, the cumulative outstanding bonds managed by the Reserve Bank of India (RBI) on behalf of the government rose to 120.6 tonnes from 108.95 tonnes as of the first bond issuance of the current fiscal on 27 June.

Graphic: Mint
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Graphic: Mint

“Growing uncertainty in the global macroeconomic environment, high interest rates in the US, amid persistently high inflation, and a weaker rupee have kept gold prices elevated and increased demand for the bonds," said Shekhar Bhandari, president of global transaction banking at Kotak Mahindra Bank. Bhandari expects the demand for bonds to remain robust given gold’s status as an “inflation hedge" and “safe-haven" asset.

The cumulative value of bonds subscribed—the government’s liability—stands at 56,342 crore against 24,318 crore of net assets under management by mutual funds’ gold ETF schemes as of August end.

“Retail and HNI interest in SGBs has spurted as investors are becoming increasingly aware of the benefits of the interest component of the SGBs," said Naveen Mathur, director (commodities & currencies), Anand Rathi Share And Stock Brokers. “Gold price has remained more or less steady in line with international gold amid crude prices rising sharply over the same period."

SGBs come with a coupon rate of 2.5% per annum, payable semiannually, on the issue price. This is a unique proposition for investors, according to Bhandari and Mathur, as it ensures that investors get interest besides capital appreciation when gold rises. The issue price when SGBs were first launched on 30 November 2015 was 2,684 a gram. The current price of 5,923 implies a return of 120% over eight years.

The international gold spot price remained little changed, moving from $1919 an ounce (31.10 gms) at June-end to $1,911 currently. Taking cues from the overseas price, the SGB price issue price stood at 5,923 per gram on 20 September, almost steady from 27 June’s 5,926 issue price. Over this period, Brent crude has jumped 23% to $92.46 a barrel currently.

Mathur remains bullish on gold because of upcoming festival demand from India, the world’s second-largest consumer of the yellow metal after China, having imported 158.1 tonnes in the June quarter, and rising crude prices. Stronger crude prices raise India’s current account deficit, which pressures the rupee. As the rupee weakens, gold rises as it’s priced in dollars.

Bonds are sold through offices or branches of nationalized banks, scheduled private banks, scheduled foreign banks, designated post offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorized stock exchanges either directly or through their agents.

Interest is added to the income slab of the investor, and capital gains are exempt from tax. Though the tenor of the bond is eight years, early encashment/redemption of the bond is allowed after the fifth year from the date of issue on coupon payment dates. The bond will be tradable on exchanges if held in demat form. It can also be transferred to any other eligible investor.

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