After starting various gold bond schemes to reduce the demand for physical gold which, at one time, threatened to wreck the balance of payments, the government has been forced to beat a hasty retreat. Compared to the Rs 10,000 crore budgeted, the government has reportedly cut its target by half for various gold bond schemes. The sovereign gold bond, gold monetisation and Indian gold coin were launched, in November 2015, to capture that part of gold bought for purposes of investment, and even paid an interest rate to buyers—unlike physical gold, to add to the attractiveness of these gold schemes, there would be no storage or insurance charges since they were in paper form. The first five tranches paid a 2.75% interest rate while the sixth and the just-concluded seventh tranche paid an interest rate of 2.5% per annum. Despite these benefits, and a discount of Rs 50 on the issue price in the sixth and seventh tranche—and several changes in the norms by the government and RBI—the paper alternative to address investment demand for the yellow metal has failed to excite buyers. In 2016, despite five tranches, the government could raise only Rs 3,881 crore or 13 tonnes worth of gold, which is just about 2% of that year’s total gold demand of 675.5 tonnes.
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If the scheme has to do well, the government has to address the serious lacunae in what is on offer—for the bonds to succeed, they must have every positive attribute physical gold has. Since liquidity is a major reason for buying gold, few investors want to touch a product that locks them in for a period of eight years as the gold bonds do—premature redemption is permitted from the fifth year, but that requires putting in a request a month before the redemption date. Though the bonds are tradeable on both NSE and BSE if held in demat form, selling by individuals is a herculean task as the secondary market is almost non-existent. Ideally, the scheme has to be fully liquid and redeemable at banks and post offices. Also, instead of issuing these bonds in tranches, the government should sell them over the counter at banks and post offices round the year, like fixed deposits or mutual funds—after all, investors buy gold when they want to, not based on a government-determined calendar. An equally big problem relates to pricing. Since gold prices—both for purchases as well as for redemptions—are based on the average of the last five days, this means buyers/sellers get short-changed. When gold prices rise suddenly, a seller gets less of the upside; when prices are falling, a buyer is unable to gain as much in terms of being able to buy at a low price.