Sovereign gold bonds in India outshine yellow metal as trade volume climbs

Investors have earned more through sovereign gold bonds than physical gold ever since the paper version of the yellow metal was introduced in November last year. Prices of physical gold have risen 23% to Rs.3,089 per gram on the MCX during the same period.

To be sure, the price of the gold bonds depends on that of the underlying physical gold and the bonds traded on exchanges currently are from the first tranche, the price of which was the lowest compared with the tranches that followed.

The government issued gold bonds worth an aggregate Rs.1,050 crore in three tranches and will issue a fourth tranche later this month. The Reserve Bank of India (RBI) had set the price for the first tranche of bonds at Rs.2,682 per gram, which was higher than the price of physical gold-Rs.2,505 per gram-at that time. These bonds are now traded at a premium of over 27%. A little over Rs.250 crore was received by the government as subscription in the first tranche. But the subscription rose in the second tranche to Rs.726 crore because the price of the bond was set higher than the price of physical gold at that time. Given that investments during March are largely driven by tax planning, the subscription at the third tranche that opened between 8 March and 14 March was lower at Rs.329 crore. The price for the third tranche was set at Rs.2,916 per gram.

The central bank has set the price for the fourth tranche which would be open for subscription between 18 July and 22 July at Rs.3,119 per gram..

Gold bonds, issued by the government, are denominated in grams with a maximum tenure of eight years. Investors get a fixed interest rate of 2.75% per annum on these bonds over and above the capital gains that may accrue if the price of gold rises in the spot market. Given the hefty premium that sovereign gold bonds command now, it is not a surprise that trading has picked up.

A month since this first tranche of gold bonds were allowed to be traded on 15 June, volume has more than doubled on the stock exchanges, belying the popular belief that gold in paper form would not find favour with Indians, traditionally big buyers of physical gold. "This is a good sign given that gold bonds are a retail product. This shows people are willing to trade. My guess would be that the trades are driven by HNIs (high net worth individuals)," said an official at a wealth management firm, seeking anonymity as he is not authorised to speak to the media. The gold bonds are part of the government's gold monetization efforts launched in November last year, aimed to wean the public off physical gold. Import of physical gold had resulted in a burgeoning current account deficit for the country in fiscal 2014. According to World Bank estimates, around Rs.20,000 crore worth of gold is lying with Indian households.

Meanwhile, Gold edged lower early Monday, after registering its first weekly decline since May last week, following a failed attempt to seize power in Turkey which was seen having limited impact on the global markets. Spot gold slipped 0.5 per cent to $1,331.14 per ounce by 0101 GMT. Bullion fell over 2 per cent last week, its first weekly decline in seven weeks. US gold was up 0.3 per cent to $1,331.90 an ounce.

Turkey widened a crackdown on suspected supporters of the failed military coup, taking the number of people rounded up in the armed forces and judiciary to 6,000, and the government said it was in control of the country and economy. US retail sales rose more than expected in June as Americans bought motor vehicles and a variety of other goods, bolstering views that economic growth picked up in the second quarter.

Soaring gold and silver prices have clipped a deal-making spree for metals streaming companies - the mining financiers that provided a lifeline to the cash-strapped industry in recent years. As gold's safe-haven appeal waned, speculators cut their record bullish bets for the first time in five weeks, US Commodity Futures Trading Commission (CFTC) data showed.

However, hedge funds and money managers again raised their net long positions in COMEX silver futures and options to fresh record highs in the week to July 12, as spot prices hovered near two-year highs.