Are sovereign gold bonds the new ‘gold standard’ in investing?
₹72,264 crore through sovereign gold bonds since 2015. This issuance is backloaded, with ₹46,000 crore of the total amount being raised since 2021-22. The latest two SGB issues, made in December and February, raised about ₹15,500 crore cumulatively.
In other words, these two issues accounted for about one-fifth of the total SGB collection from the 67 issues so far. Given that annualized returns on gold bonds are running at 16-19%, prices of gold bonds on the secondary market have soared. The price of the SGB issued in December has risen by about 29% since January.
The bonds issued in February have been even more lucrative, giving the same returns since March. Adding to demand is investors’ perception that the government may slow down on the issuance of such bonds, given the high excess returns it has to pay on them. On 23 July, Union finance minister Nirmala Sitharaman announced a cut in the customs duty on gold and silver, from 15% to 6%.
The move represented a reversal of successive increases in customs duty on gold—from 2% in 2012 to 15% in July 2022. According to data from the World Gold Council, the recent duty cut is the sharpest during this period, and takes customs duty rates to January 2013 levels. One objective of the rate cut was to reduce gold smuggling.
Gold prices surged in the immediate aftermath, then fell, but have been rising again. Cumulatively, over the past month gold prices have risen by about 5%. Sovereign gold bond prices have followed suit.
The duty cut is expected to spur demand, especially ahead of the festival season this year. The expectation is that gold bond prices will rise further from current levels. The four tranches issued in 2015-16 have matured fully and been redeemed.
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