Though the sovereign gold bond scheme was meant to take care of the investors’ need to buy gold as an investment against high inflation and poor growth or lack of better investment alternatives, the first tranche of the scheme appears to have been a big flop. This is hardly surprising since a scheme that aims to supplant the need for physical gold—Indians bought 268 tonnes of gold worth $9.7 billion in the quarter ended September 2015 versus $9.3 billion in the same period in 2014 and $6.3 billion in 2013—must mimic all its attributes, and that is something the gold bond does not do in certain critical respects. The idea of the gold bond is that it will give investors higher returns than gold does—there is an interest attached to it—so the price at which the bond is sold and redeemed has to be the price on the day of the purchase/sale. Instead, what RBI did was to fix the price of the bond at the average of the previous week’s closing. And, in the case of redemption, the same principle was to be used. When prices for gold are falling as they are today, fixing prices on the basis of the average of the last week’s prices means RBI will be charging investors more than the value of the gold on that particular day. And in case gold prices are rising around the time of the redemption, investors will get lower redemption prices. When RBI fixed the gold price for the first auction at R2,684 per gm, this was 2% higher than the market price, enough to wipe out the benefit of the interest rate being paid.
The stringent KYC norms implemented for bonds, as this newspaper has argued before, are also a deterrent. A very large share of the gold traded today is bought without any KYC, though the law requires this. The government’s reason for having a strict KYC for gold bonds is that, were this to be relaxed, the gold bonds would be used as a channel to launder black money. This is a frivolous argument since black money does not become white just by virtue of being invested in gold bonds as opposed to physical gold. All that making it difficult for black money to be parked in gold bonds does is to ensure that investors continue to flock to physical gold. With Indians buying 947 tonnes of gold in 2013 and 810 tonnes in 2014, what this did was to add $42.7 billion and $33.4 billion, respectively, to the current account deficit, and put further pressure on the rupee as well—of this, roughly 70% was for jewellery and the rest for pure investment.
Also, as in the case of insurance, there is no ready demand for gold bonds—as the saying about insurance goes, it is never bought, it is sold. This means there have to either be sizeable commissions for those doing the selling—like banks or jewellers—or there has to be a big publicity blitz of the type done by the government for the GiveItUp campaign for LPG. In addition, since there is no fixed timetable for people buying gold, either for investment or for jewellery, it is difficult to understand why the product is not available on tap—right now, RBI plans to open short windows in which the bonds will be made available, but there is no advance timetable for this. By the time the next window opens, all of this needs to be fixed; else, the scheme will remain a flop.