Deciphering sovereign gold bonds

GoI(Government of India) pioneered a scheme to counter the import bills; weighing gargantuan tonnes and valuing billions. Sovereign gold bonds (SGB) are issued by RBI(Reserve Bank of India) on behalf of GoI. It satisfies the thirst for investment, banishing the risk of physical possession of the metal. The security cover bestowed on the metal in the safe vaults of each bank is analogous to SPF (Special Security Force). Why guard the metal anymore, when reality is drawing congruence with virtuality across the globe. Ranging from currencies, entertainment avenues, meetings ; the virtual list is ceaseless.

SGBS (Sovereign Gold Bond Scheme) is akin to purchasing virtual yellow metal. Here goes its modus operandi. The SGB purchased gets listed as a part of your holdings in your demat account. The redemption period for the bond is 8 years – if you unwilling to shed out capital gains tax. Listing of SGB in stock exchanges have given an impetus to its liquidity. There’s an option to exit at the 5/6/7 year, albeit capital gains get attracted. The bond also pays you 2.5% p.a, juxtapose them with the locker charges+ GST we dole out, in the case of physical gold. In addition, SGB deepens your pocket by eliminating making and wastage charges. At the end of the tenure, we get a credit equivalent of the prevailing market price of the metal in our account. The yellow metal (per 10 gram) has been oscillating in about Rs 4000-5000 ballpark in the 1990’s. I leave it to you, to find out its equivalent value, incumbent and take a call on how rewarding the metal is!

From the GoI’s perspective, its a borrowing avenue within its geographic contours. Ergo, eliminating the risk of dependence on external borrowings. The interest expense is capped at 2.5% p.a for 8 years, however the GoI bears the risk of oscillating market prices. As of June 2019, India ranks 10th among the economies, holding 613 tonnes of the coveted metal.The count is in exclusion of private holdings in temples and households, a round about estimate of which can only be dreamt of. The Greenback (USA) economy tops the list with 8133 tonnes.

With the composition of millennial population sloping upwards, the craving for the metal in its physical form slope downwards. Not far-stretched are the days, when indian imports of the yellow metal will turn minuscule. It checks the drain of foreign currency reserves, implicitly strengthening our indigenous currency against the greenback. Lesser the import, lesser the demand for the greenback, stronger the yellow metal vis-a-vis Indian rupee. Curbing crude imports is an ambitious target, crude being sacrosanct for the economy, which is not the case with gold.

So hold your horses before you step into a jewellery next time. Probably, with pandemic outbreak in mind, GoI has decided to issue six tranches of SGB through September 2020. Stay home, invest in SGBS and try out your fortune.

Published by adithyaarunachalam

I'm a millennial, from Chennai, India. Passionate about building up a career in finance, I follow and stay abreast on news feeds. I'm a novice blogger, So feel free to pass on your conjecture to me

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