The market is rife with rumours that the government might take radical measures to unearth unaccounted wealth in the form of gold. This has made consumers uncomfortable about buying physical gold. A portion of the demand is expected to shift to Sovereign Gold Bonds issued by the RBI. These bonds offer 2.5% interest per annum (payable half-yearly) and their price is linked to the prevailing market price of gold. The bonds are listed on the exchange, facilitating early exit for investors. They mature in eight years, with an exit option at the end of five years from the date of issue. Sovereign Gold Bonds are a superior option to physical gold because while investors are assured of the market value of gold at the time of maturity, they also get periodical interest income. What’s more, the capital gains are fully tax exempt if the bonds are held till maturity and the investor can claim indexation benefits if he exits after one year.
The Sovereign Gold Bonds have evoked good response. Investors have bought bonds worth 14,071 kg of gold amounting to Rs 4,027 crore till now. The latest tranche, which was issued at a Rs 50 per gram discount on the prevailing market price of gold, saw investors buy bonds worth roughly Rs 915 crore. Anil Chopra, Group CEO and Director, Bajaj Capital, asserts gold bonds are a better alternative to physical gold. “Gold bonds not only provide better tax efficiency if held till maturity, they also do not have problems regarding safety and purity as is the case with physical gold.” Tanwir Alam, Managing Director of Fincart, reckons gold bonds will be a good alternative to fixed deposits as interest rates are likely to dip.
However, if the government cuts the interest rate on gold bonds, they will lose some of their charm. Since these bonds are linked to gold prices, a sustained disinflationary environment globally would also impact their returns, says Alam.
Investors may be deterred by some niggling issues as well. The latest issue concluded on 2 November but customers have not yet received the bonds. This could put off some investors, feels Manoj Nagpal, CEO, Outlook Asia Capital. “A better mechanism needs to be put in place by the RBI for the credit of these instruments in a defined timeframe.” There are other issues as well. While these gold bonds can be used as collateral for loans, several banks are refusing to sanction loans against them, says Vikram Dalal, Managing Director, Synergee Capital.
Meanwhile, the government’s Gold Monetisation Scheme has evoked lukewarm response, with a total of 5,730 kg of gold mobilised under the scheme as on 14 November. The scheme allows individuals to earn interest on idle, unused stock of physical gold in the form of jewellery, bars or coins. Depositors can get back the gold in physical form or in Indian rupees at prevailing market value at time of redemption. There is no capital gains tax on the appreciation in the value of gold deposited, or on the interest earned from it. Yet, investors have kept away from the scheme. “There are only limited number of branches for assaying the gold and investors have no control on the purification and no clarity on grammage of gold they will get in return for the gold they deposit,” says Amol Joshi, Founder, PlanRupee Investment Services. Most individuals hold physical gold in the form of jewellery, where the purity of the gold is often suspect and there is a high incidence of making charges. This deters people from submitting their gold lest it is valued far lesser than they expect. Also, the emotional attachment to jewellery and its snob value prevents most from parting with it. Even if a limit is put on gold holdings, people are likely to stay away from this scheme.