Gold Bonds

Will the fourth tranche be as attractive as the previous ones?

The government of India will be launching its fourth tranche of gold bonds from July 18th to July 22nd. The first 3 tranches have seen the interest in gold bonds gradually build up as the regulatory ecosystem as well as the prices of gold supported these gold bonds. Is the current tranche as attractive as the previous ones?

Recapping the gold bond scheme…

The original idea behind the gold bond scheme was to absorb some of the gold demand in the Indian economy through the issue of non-physical gold in the form of gold bonds. India was running a huge import bill on gold and it was the second biggest item of import payouts after oil. This was a clear waste of precious forex reserves as they were being utilized to pay for an unproductive asset. When the gold bond scheme was first introduced in November 2015, it took time to pick up as the pricing was not properly done. However, subsequent tranches were priced closer to the market price and the government also offered tax exemptions to prod investors to put money in these bonds. The 2.75% interest also worked as a major incentive for buyers. Gold bonds purchased in the first 2 tranches have given phenomenal returns as gold has appreciated by nearly 26% since the beginning of January 2015. The question is whether gold can sustain its price appreciation and what does that mean for the current tranche?

Returns could be muted…

The fourth tranche of gold bonds are being issued at a price of Rs.3119/gram. This is fairly close to the market price prevailing in the gold markets. The question is about the upside. Gold prices benefited over the last few months on the back of global uncertainty. There was the volatile geopolitical situation in West Asia, the uncertainty over the revival in the US economy, doubts over Fed rate hikes, slowdown in Europe as well as the looming BREXIT vote. Normally gold, as an asset class thrives in periods of uncertainty and that explains why gold appreciated by 26% in the last 6 months. But what does that mean for the latest tranche of gold bonds being issued.

Look at gold bonds differently…

To be fair, gold bonds cannot be looked at purely in terms of returns like equities. They are important as they offer a hedge against other asset classes. Also, these gold bonds carry 2.75% coupon interest and will also be listed at the end of 6 months, providing the much needed liquidity. Globally, liberal monetary policies have debased currency values substantially. Gold emerges as the one non-fiat currency that remains a stable alternative. Gold bonds must be seen as a necessary hedge to your overall portfolio. Gold may not appreciate like H1-2016 but it surely has its own place. ©

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