Midas Touch: The Sovereign Gold Bond Puzzle

What is this all about really?

The Indian crush on gold is not a new story, so when the Reserve Bank of India came up with the policy for Sovereign Gold Bonds in 2015, it was the best thing that could have happened to the Indian investor, in terms of gaining a risk-free instrument they could trust. For the government, the SGB scheme was part of its broad strategy to reduce demand for gold and manage trade deficit while promoting savings. By channelling household savings to financial assets like SGBs, the aim, was to create macroeconomic stability. But less than a decade into the policy, with the maturation of its initial tranches coming up, the scheme has proven itself as expensive. While there’s curiosity rife about the next round of issues that the government might make of these bonds, here’s a deep take on how these bonds work.

The correction on duty on the import of gold and silver may make the purchase of real gold more appealing for investors looking for portfolio diversification. However, there is still no clear indication whether the SGBs would be phased out as well. Investors would however still have avenues like ETFs for building their gold assets.