Sovereign Gold Bonds Scheme: All You Need To Know

Sovereign Gold Bonds scheme was launched in the budget session 2016 and approved by the cabinet to reduce the demand for physical gold

Gold Bonds are issued by RBI with a fixed interest rate
Ministry of Finance is the concerned ministry
RBI in consultation with Finance ministry determines the issuing amount
Risk of gold price changes borne by the Gold Reserve Fund created by RBI
GOI aims to shift 300 tonnes of Gold purchased annually as bars and coins into the Gold Bond Scheme
This Gold Bond scheme is expected to help GOI sustain the current account deficit

Gold Bonds are sold in banks
Investor can walk in buy the gold bonds from the banks preferably where they have their Saving Bank accounts
Gold Bonds are treated in a similar manner as a Bank Fixed Deposit
The interest rates are fixed at 1 to 2 percent
The tenure of the bond is from 5 to 7 years
Value of the bond is determined by the gold price movements in the market
Gold Bonds have an attractive feature
The investor will get the value of bond according to the prevailing gold prices in the market at the time of redemption
In this manner, the investor will get the same benefit of purchasing the metal gold without actually purchasing it
In this manner, GOI can restrict Gold imports to a certain extent
Returns on gold bonds can be positive or negative
All risks of the gold bond are covered under the Gold Reserve Fund

Bonds issued by RBI with a sovereign guarantee
Bonds can be easily traded and sold on exchanges
Gold Reserve Fund will be created by GOI through RBI
On gold bond maturity, redemption will be made in Rupee only
Price of gold bond will vary with the market prices of gold
Investor needs to be aware of this price volatility
Gold bond deposits will not be hedged
RBI has fixed tenor of the bond from 5 to 7 years to protect the investors from medium term volatility

NRI cannot buy gold bonds issued by RBI
Common Indian buys gold for marriage and other occasions as a Jewellery and not for investment purpose
The attitude of a common Indian towards gold is not of investor nature
This attitude will see a Luke warm response to the Gold bonds scheme
Also, the interest rate offered is very low in the tune of 1% to 2%

The effectiveness of the scheme will depend on the investor attitude towards the gold bond scheme
GOI must take steps to change the mindset of Indians from viewing gold as a jewellery or a status symbol to an investment avenue
This transition in behaviour of Indians will take time
Overall, Gold bond scheme is a welcome measure to cut imports on gold purchase

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