Why It Is Patriotic To Buy/Subscribe To Sovereign Gold Bonds

Why It Is Patriotic To Buy/Subscribe To Sovereign Gold Bonds

 

 

Indians have been married to the concept of buying Gold as a safety reserve for unforeseen circumstances and love for gold is deeply entrenched into Indian psyche. However, these individual accumulation of gold for pleasure or investment does not benefit the economy of the country as it largely takes the gold out of circulation kept hoarded at homes or bank lockers. It has also become a means for scruplus people to keep their unaccounted black money hidden in the form of gold.

The Indian government Gold reserves are estimated to be 800 metric tons as on QE June 2019. At the same time the gold held by individuals/ trusts/ temples/ churches/ mosques etc could be more the 20 times this the gold reserves of the government. As in earlier times when Gold Standards were being followed and every country's currency valuation and the ability of the government to print new currency was linked to their Gold Reserves, the holding by each country was regularly monitored and was part of day to day economic calculations. However, since coming off Gold Standards and adoption of Dollar Standards the shine of the Gold Reserves by a country went to back burners. This was also an era when countries were talking about and aspiring for Globalisation hence aligning to a common recognized Dollar Standards for trade was beneficial. And this is where we stand today.

In today's times of 21st century as nations are marching into their future, the recent protectionist philosophy entering the world trade and punitive tariffs being imposed impromptu has become the daily news ticker or tweet. The Dollar Standards provides an inherent advantage and supremacy to USA and it has reaped very rewarding benefits out of it. However, now as every nation is starting to flex it's muscle for survival and growth there is a distinct undercurrent against the Dollar Standard and the world is again looking for a viable option. Russia and China being at the forefront have been building up their gold reserves, as do some other nations. And gold purchased by nations and their reserves are strictly monitored by international bodies. Further, countries have now started entering into bilateral trades in their own currencies and the day is not far when they will equivocally and unilaterally denounce the Dollar Stardard.

India being a developing economy is still fighting to meet the need of large scale government spending to spur the growth and development on one side and to keep the budget deficit within control on the other side. In these circumstances it is not possible for India to spend large sums of money in importing gold to build it’s own Sovereign Gold Reserves. However, realizing the changing dynamics of International trade and relationships it becomes prudent for Indian Government to also start building up it’s gold reserves. And Indian citizens unfalling love for gold has become the means to it with public participation thorough knowingly or unknowingly by public at large.

The Sovereign Gold Bond launched by the government is a silent and stealthy way for the Indian Government to buildup it’s own gold reserves by encouraging public participation. It is also aimed at weaning away the public from hoarding physical gold and move towards digital gold, specially the investment done in this commodity which is not for immediate consumption.

 

So how does it help the Government?

 

The first scheme of the Sovereign Gold Bond was launched in 2015. The scheme facilitated individuals / trusts / institutions / funds / corporate to buy gold bonds for as low as 1 Gm to 4 KG for individuals and 20 KG for trusts/institutions at the then calculated market price in digital form. The government not only offered a discount of Rs 50 per Gram to retail investors but also offered a 2.5% rate of interest per annum paid six monthly to all investors. The scheme has a lock-in of 8 years.

In a way this facilitated an investor an option to invest in digital gold, get 2.5% rate of interest on their cumulative holding and also gain in terms of appreciation of gold price at the time of selling the capital gains thus accrued fully Tax Free. This scheme launched at a time when the economy was faltering was lapped up by everyone. The schemes are launched every quarter in a given financial year (refered as tranche 2019-20 and series 1/2/3/4 so on).  By now the Tranche 2020-21 scheme is on offer.

 Launching of roughly 20th schemes within a span of 5 Years clearly shows the popularity among the investors and success of the intent of the government.

But if we just step aside and go behind the scheme of things, we will marvel at the brilliance and long term economic prudence of the government. What is happening in effect is that the government is borrowing capital or money from the public at a meager rate of interest of 2.5% and investing in gold and thus building it’s own Sovereign Gold Reserves. The Indian Public who are investing in these Sovereign Gold bonds are issued with a digital certificate with a lock-in of 8 years and paid interest of 2.5% per annum.

For every digital certificate purchased, Government or say RBI is purchasing that much quantity of physical gold from the market and storing it, in it’s strongholds as security. If we just do a back of the paper rough calculations and say with every Sovereign Gold Bond scheme there was a public demand of say 10 metric tons then by now with 20th schemes already subscribed, the Government would have accumulated close to additional 200 metric tons of gold building up it’s reserves from 800 metric tons to 1000 Metric tons. And that to without raising an eyebrow of any nation or international body and that too without sweating it’s own foreign currency reserves. And paying only 2.5% rate of interest while the ongoing borrowing rates in the market is anywhere between 8% and above ( for government borrowing on treasury bills/ bond is around 5.5%).

Secondly with a lock-in of 8 years the earliest redemption by public will come up in the year 2023-24 and subsequent years. The government will be paying back the public at then prevalent rate of gold in Indian Rupees on redemption. Now for paying back the public on redemption the government need not and will not sell the gold it is holding in reserves. It will simply merge this gold resrve in it’s own Sovereign Reserves and pay the public from the exchequer/ account. Further if the government keeps bringing on these schemes in future also then it can easily pay the redeeming public of one scheme from the new subscription received from new investing public (ironically what is done by most Ponzi schemes but here there is a sovereign authority backing the bond hence legal) without depleting it’s own physical gold reserves.

I find this a very brilliant move by the Indian Government in silently and stealthily building it’s own Sovereign Gold Reserves without sending panic alarm bells either in the International market or in the Indian market. Thus strengthening the Indian economy and Indian Rupees and preparing for the inevitable and eminent Dollar Crash in near future.

And just for this reason I will end by suggesting that it may be a patriotic thing for Indian citizens to subscribe to these Sovereign Gold Bonds as this becomes the win-win situation for both the investor and the country.

 

Some basic details of the scheme.

 

Sovereign Gold Bonds

 

Key Features

The bond bears an interest at the rate of 2.50% (fixed rate) per annum on the nominal value.

Interest will be credited semi-annually to the investor's account and the last interest will be payable on maturity along with the principal

Investors will earn returns linked to gold prices

Bond carry sovereign guarantee both on redemption amount and on the interest

Minimum investment: 1 gram. Maximum investment: 4 Kgs for individual, 4 Kgs for HUF and 20 Kgs for trust and similar entities per fiscal (April-March)

Available in DEMAT and paper form

Tradable on National Stock Exchange of India Limited

Issuance through trading members of NSE

 

Advantages

Safest: Zero risk of handling physical gold

Earn Interest: 2.50% assured interest per annum on the issue price

Tax Benefits: No TDS applicable on interest
Indexation benefit if bond is transferred before maturity
Capital gain tax exempt on redemption

Assurance of Purity: Gold bond prices are linked to price of gold of 999 purity (24 carat) published by IBJA.

Sovereign Guarantee: Both on redemption amount and on the interest

Easy Exit Option: The tenor of the bond is for 8 years with an option to redeem from 5th year onwards on the date on which interest is payable

Traded on Exchange: All earlier issuance of SGB are available for trading on NSE

Ease of Borrowing Loan: Can be used as collateral for loans

 

Comparison of Physical gold, Gold ETF and Sovereign Gold Bond

 

Points	Physical Gold	Gold ETF	Sovereign Gold Bond
Returns	Lower than actual return on gold	Lower than actual return on gold	Higher than actual return on gold
Safety	Risk of handling physical gold	High	High
Purity of Gold	Purity of Gold always remains a question	High as it is in Electronic Form	High as it is in Electronic Form
Capital Gain	Long term capital gain applicable after 3 years	Long term capital gain applicable after 3 years	Long term capital gain applicable after 3 years. ( No Capital gain tax if held till maturity )
Collateral against Loan	Yes	No	Yes
Tradability / Exit Route	Conditional	Tradable on Exchange	Tradable on Exchange. Redemption- 5th year onwards with GoI
Storage Cost	High	Very Low	Very Low

 

 

Where can you buy it?

Investors can apply for the bond through SEBI authorized trading members and financial advisors of National Stock Exchange of India Limited and other channels specified by RBI. Application forms will be provided by trading members, authorized agents and can also be downloaded from RBI's website.

 

Happy Investing