The first tranche of Sovereign Gold Bonds (SGB) for fiscal 2017-18 (and eighth in the series starting 2015-16) will open for subscription on 24 April and close on 28 April, a day ahead of Akshaya Trithiya, an auspicious day on the Hindu calendar, when families purchase a small quantity of the yellow metal as part of tradition.
The issue price of the upcoming bonds will be Rs 2,901 per gram, Rs 50 less than the nominal value (Rs 2,951), based on the simple average closing price published by the India Bullion and Jewellers Association for 999 purity gold for the week preceding the subscription period 17-21 April 2017.
Key Features of SGB Scheme
The tenor of the bond will be for a period of eight years, with exit option permitted from the fifth year of the date of issue. Liquidity is available from secondary markets as the bonds are mandated to be listed on NSE and BSE.
A key attraction of the SGB scheme is the 2.5 percent per annum interest that the investment carries. To be sure, physical gold is an unproductive asset that does not deliver any financial returns to the investor.
In addition to interest on investment, these bonds carry a sovereign guarantee, and do not entail fund management fee or brokerage charges. There could be capital gains in case the price at the time of redemption is higher than the issue price. SGBs can be used as collateral for loans.
Announced as part of Union Budget 2015-16, the SGB scheme aims to develop a financial asset as an alternative to purchasing metal gold. India’s ravenous appetite for gold is legendary. The country is arguably the world’s largest importer with annual inflows of 600-800 tonnes valued at $30-35 billion.
Chances of Success
Although claimed to have received good response, SGB scheme has attracted only a moderate level of investor interest. Cumulatively so far, bonds worth Rs 6,000 crore representing slightly less than 20,000 kilograms (20 tonnes) have been issued.
Considering the volume of physical imports, investor interest in SGBs can be described as tepid. For retail buyers, physical gold has an emotional connect because it is not only an investment asset but also a consumption asset, and often substitutes currency.
What are the chances of success for SGB Scheme 2017-18 and possible future tranches? For one, demonetisation in November 2016 has sucked out excess physical cash (often unaccounted) available with people. More important is the outlook for gold prices five to eight years from now.
In other words, will SGB buyers enjoy capital gains at the time of redemption or will prices decline below the issue price and erode even the interest gains?
Timing the Exit
So, here’s the key question investors seek answer to: Where would domestic gold prices be in a 5 to 8 year time frame? While forecasting gold price is seldom easy, some pointers are indeed available.
Admittedly, the size of India’s population and traditional consumption habits will continue to drive demand for gold in the foreseeable future. However, with robust economic growth, rising income and education levels, age profile of the population, rising aspiration levels, evolving lifestyles as also availability of multiple investment options, the share of gold for investment purpose is likely to steadily decline.
If India’s economic growth aspirations materialise, the rupee may well be at Rs 50-55 to a US dollar 5-8 years from now. From the supply side, globally, with improved excavation and extraction technology leading to falling production costs, gold prices may come under downward pressure, and trade well below $1000 an ounce. In other words, there could potentially be a collapse of gold prices going forward. For SGB investors, timing the exit is critical.
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(G. Chandrashekhar is an independent Policy Commentator and Commodities Market Specialist. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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