Sovereign Gold Bonds to attract investors over other options: Report

Mumbai: Sovereign gold bonds are likely to excel over other investment products such as gold exchange traded funds and physical bars, says a report.

The Sovereign Gold Bond Scheme (SGBS) may address pure investment demand for the yellow metal and is easy to implement relative to the gold monetisation scheme, the India Ratings report said.

It said the successful launch of this product may ensure that physical gold is used mostly for manufacturing jewellery, and gold bonds for investments.

Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock because it will offer the benefit of gold without any handling and storage costs, it pointed out.

It will relieve investors of the need to check the quality of gold and with valuation and these bonds can also be easier to use as collateral.

As the counterpart is the government, it will take the risk of higher prices and if they fall, the investor would be given an option to roll over their holdings for an additional period, the report noted.

However, the sovereign gold bonds are beneficial only if bought for investment purposes.

The Sovereign Gold Bonds will offer an interest rate of 2.75 percent and will remain open for public subscription between November 5-20.

The gold bond scheme will offer investors a choice to buy bonds worth 2 grams of gold, up to a maximum of 500 grams, requiring certain minimum investment.

Ind-Ra said it could that mean small investors may not be able to take advantage of this scheme unlike the case with gold exchange traded funds or gold mutual funds.

In case of sovereign gold bonds, both upside gains and downside risks will be with the investor.

However, in case gold prices fall, losses from a systematic investment plan in gold exchange traded funds or gold mutual funds will be lower than for lump sum investments in sovereign gold bonds, it added.

The gold monetisation scheme is also a positive step taken by the Centre to unlock the value of the precious metal held by households or institutions and to reduce the dependence of investors and gems and jewellery sector on imported gold, Ind-Ra said.

The scheme offers all the benefits of physical gold minus the risk, it will convert the unproductive asset (lying idle) into a productive asset (used by the gems and jewellery sector), it said.

It will also help in reducing the black economy, as gold along with real estate is often used as safe haven to park black money, it added.

However, the gold monetisation scheme include, the scheme envisages holding gold only in its pure form, resulting in the melting of the deposited jewellery and ascertaining its pure gold value.

This will be a disincentive for a large number of households who generally want to keep gold in the form of jewellery and may not want to see their long-preserved, family-inherited, emotionally attached, piece of gold lose its identity and feel, for meagre returns, the report said.