The reason for the lukewarm demand are what they were 2.5 years ago, that the bond doesn’t mimic the qualities of gold.
Though gold demand rose by around 9% in 2017, the 727-tonne demand in that year was much lower than the 916 tonnes in 2012 or the 959 tonnes in 2013, years in which this demand wreaked havoc on the current account deficit. In FY13, for instance, gold imports were $53.8 billion or 2.9% of that year’s GDP —the current account deficit was 4.8% of GDP in that year. Though demand for goods usually rises when prices fall, in the case of items like gold that are also a store of value, the demand falls when prices fall. So, gold demand was 278.2 tonnes in Q4 2012 when prices were $1,721 per troy ounce and this fell to 249.3 tonnes in Q4 2017 when prices fell to $1,275 per troy ounce. Data collated from Bloomberg shows that while the returns on gold bought on Akshaya Tritiya were 7.7% in 2018—that is, on gold bought in 2017—this was a mere 2% over a two-year period, 5.2% over three years and 2.9% over five years.
Even at these levels, the import of gold is not insignificant—in FY17, India imported $27.52 billion of gold, or 1.8 times the year’s current account deficit of $15.2 billion. So, it is not surprising that the government should want to keep pushing various gold bond schemes that investors can buy instead of physical gold. While those buying gold for making jewellery will, by and large, not be interested in buying gold bonds, the government is targeting those who buy it purely as an investment option. Though this proportion has reduced, it is still significant. In 2012, around 35% of all gold demand was for bars and coins, generally interpreted as investment demand; in 2017, this proportion fell to 22.6%. Even so, the 164.2 tonnes of investment demand in 2017 is valued at $6.64 billion and is significant.
The problem is, the government has not been able to mop up any significant amount through the bonds even though they even give investors a 2.5% interest rate—it used to be 2.75% in the first five tranches—and a discount of Rs 50 per gram is also given. According to a government statement, a total of 21 gold tranches since November 2015 have managed to mop up Rs 6,650 crore, or around 22.8 tonnes of gold. To put this in perspective, since November 2015, India’s total investment demand—or the demand that could potentially switch to bonds—was around 386 tonnes.
The reason for the lukewarm demand are what they were 2.5 years ago, that the bond doesn’t mimic the qualities of gold. While gold bonds can’t give the anonymity that gold offers, the bigger negative is that the bonds are not liquid—the latest bonds, of eight-year tenure, cannot be sold for at least four years, and while they can be sold after that in the market, the liquidity there is poor right now. While gold is bought and sold on the basis of the hourly/daily fluctuations in prices, the bond prices will be the average of the last three-day prices; indeed, the bonds are not even sold on tap, the government offers them on certain days only. Given these negatives have been known for so long—in the Budget, finance minister Arun Jaitley spoke of coming up with a comprehensive policy of developing gold as an asset class—it is not clear why these have not been fixed so far.