Sovereign gold bonds introduced recently by the government—a paper alternative to address investment demand for the yellow metal—didn’t excite buyers much.
The sustained drop in gold prices had taken away some lustre and investors are looking at financial products keenly. After three years of negative returns on fixed-income schemes, returns have moved up as retail inflation has fallen to 4.4% in September this year from over 11% in March 2013.
Gold bonds are a better way to put money in the metal as the investment earns an interest of 2.75% a year, payable semi-annually. Unlike ETFs, the bonds will not be backed by gold but by a sovereign guarantee.
However, to make the bonds popular, the government will have to make it available through many more outlets of banks, post offices and gold-loan NBFCs. Pricing of the bonds, too, could be an issue as it is fixed at R2,684 per gm for 999 purity—higher than the current gold price of R2,623 per gm.
The pricing needs to be dynamic where the price on the day of investment or on the allotment day is quoted to investors. In the global market, the price is likely to remain range-bound till the Fed raises the interest rate, and when it happens, there could be initial panic selling, but gold will still glitter, it appears.