Sovereign Gold Bonds to Address Import Issues: India Ratings

Mumbai: The government's sovereign gold bond scheme is expected to address pure investment demand for the yellow metal, India Ratings and Research has said. To reduce huge imports of the precious metal, Finance Minister Arun Jaitley unveiled plans in February for sovereign gold bonds and a bullion deposit scheme. Based on the recent draft guidelines, the Centre is looking out for ways to address the demand in domestic market by introducing gold bonds. Gold sovereign bonds may triumph over other comparable products in the market, such as gold exchange traded funds and physical bars, and can lead to a reduction in current account deficit. Gold sovereign bonds are easy to implement relative to the gold monetization scheme, India Ratings said in a note. A successful launch of this product may ensure that only the gold used for manufacturing jewellery forms part of the ever-growing import bill in India. Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock, it said. "...important advantage is that it may be a pure play of gold price without any handling and storage cost, which may be attributed to physical premium," the agency said. "Other advantages include that these bonds will relieve investors of the need to check the quality of gold which is a major hurdle when purchasing from local jewellers. Hence, such bonds are easier to use as collateral for both buyers and lenders." "In terms of liquidating physical gold, there is a higher bid offer spread, while losses due to such spreads may be minimal in case of a paper or demat gold bonds," it added. It also said that the only major risk is gold price. In India, investment demand for gold was 180.6 tonnes and formed 21.3 per cent of total gold demand in 2014, according to the data from the World Gold Council. When compared with the rest of the world, investment demand in the country for gold stands at 58.5 per cent of the total gold demand. While jewellery demand in India is unlikely to come down any time soon, the move by the government will shift investors from the physical ownership of the metal to bonds, it said.