Huge premium on exchange-listed bonds makes sovereign gold bonds attractive

Unlike the past three sovereign gold bond issues, the response to the fourth instalment is expected to be higher as the market price benchmark for bonds is now available. The price of the first tranche of bonds, which was listed on stock exchanges this month, has been discovered — the bonds which were issued at Rs 2,684 per gramme in last November are trading at 9-10% premium to the prevailing market price of similar quality, which is 999 purity gold.

Gold and silver have been a top-performing asset class in 2016. However, some profit booking is seen at this level and may lead to some correction. For the first time in the past 6 weeks, the largest US exchange-traded fund (ETF), SPDR, has given weekly negative close at 863 tons as on Friday’s closing. SPDR has seen a sharp demand, which was around 650 tons at start of the year.

However, an annual interest of 2.75% and the premium reflected on listed bonds makes them attractive. Sovereign bonds have emerged as a better option than other forms of gold. Further, any weakening in rupee will keep gold prices supported.

Investors have put Rs 1,318 crores, equivalent to 4.9 metric tonnes of gold, into the first 3 tranches at then prevailing prices. The first issue was at Rs 2,684 per gramme, which closed on the BSE at Rs 3,428 per gram. In the Mumbai spot market at Zaveri Bajar, 999 purity gold closed on Friday at Rs 3,108 per gram. On NSE, these bonds closed at Rs 3,400 per grammes. This means that the government is issuing new bonds at a discount to market price.

Also, the minimum investment, earlier 2 grammes, has now been reduced to 1 gramme, giving investors an opportunity to opt for a systematic investment plan if such bond issues become more frequent. Further, in the physical gold market, demand is very weak. Only 23 tons of gold was imported even in the month of June, a huge quantity of which is estimated to be for the purpose of re-export and market prices are quoted at $32.5 per ounce or Rs 700 per gram. A few days ago discount was near $50.

Due to high discount, the market was so far providing arbitrage opportunity to traders who were buying in spot and selling on MCX — which is quoting at a price higher than spot price. Now, there is another opportunity of selling first tranche gold on BSE at a premium and applying in fourth tranche — which is available quite cheaper. In such cases, however, tax aspects need to be considered. According to a government press note, “The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB (sovereign gold bond) to an individual has been exempted. The indexation benefits will be provided to long-term capital gains arising to any person on transfer of bond.” This means that bonds sold on stock exchange will get indexation benefit but first tranche has completed only 7 months of issue as their subscription was opened in November and issued in following months.

The bonds carry an interest rate of 2.75% per annum on amount invested and mature after 8 years. Investors can be apply for them through banks under ASBA (Applications supported by blocked amount) and they can also be purchased through the BSE and NSE in Demat forms and will be reflected in the consolidated Demat statement.

So far, investing in gold as financial securities was possible only through ETFs and they were listed on the stock exchange, which was providing liquidity. Now buying ETF gold contradicts sovereign bonds. As in, ETFs have to purchase equivalent physical quantity of gold, which means higher imports, while sovereign gold bonds are only financial instruments and the price and interest risk are taken care of by the government of India and they are considered a part of government borrowing.

Surendra Mehta, secretary, India Bullion and Jewellers Association, says, “Why are gold ETF needed now when sovereign gold bonds are a much better option? There are 22 tons of idle gold with gold ETF. Govt must ask all gold ETFs deposit idle gold under GMS (Gold monetisation scheme) or allow them to lease this gold”. This will help make gold monetisation successful and the gold which is leased or put under GMS will earn more for investors and replace import demand. If such facilities are allowed to ETFs, they can earn more and give higher returns to their investors. ETFs are available on tap while bonds are issued in tranches by the government.

Huge premium on exchange-listed bonds makes sovereign gold bonds attractive

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