SGBs seem to be a great way to invest in gold. Absence of making charges, GST, wastages and taxes on capital gains make it the best in my opinion.
The additional 2.5% interest have make me think whether SGBs are “too good to be true”. However, since it is backed by the RBI, I know it fully risk free and backed by the state.
This has however made me think how the government makes money on our gold (it also allows us to buy at a discount, which raises more questions in my head).
SGBs do not allow us to convert the bond to physical gold (which is fine with me). Since we can’t convert these bonds to physical gold like those digital gold investment apps, does the RBI even buy the gold physically, or is it just a bond pegged to the current gold prices. Are we just lending money to the government at a variable interest rate?
What made the government feel the need to give an additional 2.5%, when not doing it would also have made SGBs more attractive than all other gold investment options (on a purely investment note and ignoring the fact that you can’t wear SGBs to your cousin’s wedding ). Is it losing money on every SGB bond?
I couldn’t find much on why the government issues SGBs on this forum, Varsity or the internet. Anyone who is informed in these topics?
Reducing Physical Gold Demand: One of the primary reasons is to reduce the physical demand for gold. High imports of gold affect the country’s current account deficit. 2.5% interest rate is a cost the government is willing to bear for the broader benefits of reduced gold imports.
This is a good move to make your currency strong!
Gold Reserve: The government doesn’t necessarily buy physical gold for each bond issued. SGBs are more like debt instruments pegged to the price of gold, allowing the government to use the funds for other developmental purposes.
I think sgb is a perpetual thing.
Govt will issue new ones and fund the existing one.
Main issue will arise when demand reduces for primary issue and existing ones are matured AND govt don’t have money to repay.
Gold is used as a hedge against inflation and has survived multiple centuries.
Sgb is good as long as there is no sovereign default.
By having a option for pin-pointed tweaking of the Indian economy as desired,
by reducing the demand for physical gold whenever necessary,
by issuing a new tranche/series of SGBs.
This was also discussed recently in this topic-thread.
Such a scenario is an actual risk for typical debt (eg. corporate bonds).
For example, if long-term debt is refinanced periodically by short-term debt - Duration gap - Wikipedia
This is NOT an issue in case of sovereign debt (eg. GSECs, Tbills ,SGBs),
as RBI can always choose to “print money” and fulfill its debts.
By doing so, the impact on us will be in the form of devaluing the currency (INR) and NOT in the form of failure to receive the interest due or receive the principal upon maturity.
Govt collects money (loan from public) through many modes and this is one of the ways. As the scheme is good and will remain continued so Govt would be able to raise more money in future through these bonds and repay to the earlier investors.
It is almost like PPF scheme where Govt is giving about 7% interest and that is also tax free.
If Gold prices increase the price of these bonds would also increase and cost of bonds to Govt would also be high. Anyway government wants money through tax collections as well as through public loans.
Government is making a loss. The price risk was not factored in properly and my guess is all attention was given to “we don’t want economic energy to be trapped in a lump of metal while simultaneously draining our forex reserves”. All answers are trying to force fit a reasonable answer for introducing the SGB. IMHO, the government effed up and will soon stop new SGB issuance or modify its current form to de-risk itself. Make hay while the sun shines.
If they are buying gold units equivalent to purchase price, there is no price risk.
And they would not have to liquidate the gold either to pay on maturity. Subscription is increasing every year, so they can just pay whoever wants to withdraw by paying them proceeds from new inflows and allocating their gold to the newer investors.
Like a ponzi scheme, yes
I feel the interest component will stop soon, the capital gains exception + RBI’s safety/surety is lucrative enough.
This issue is discussed in past on the forum multiple time. One which I remember it this thread:
And if you go through the thread, you will see that back then too there was no unanimous answer to this. Apart from what is already discussed in this and that thread, only points I would like to make are:
Making conclusions at top of cycle is generally not very helpful. Today we are at top of gold cycle, Trailing returns look very attractive and hence in hindsight it looks like issuing SGB is a dumb decision for govt. But that was not always the case, nor it will continue.
To give some idea, I bought my first SGB in 2016, and till 2020 returns on it were really mediocre. Till that time it appeared, I made a dumb mistake buying it and govt looked smart. Post covid things have changed
Govt does lot of odd things which is difficult to quantify simply based on ROI, especially in short term. I think this is one of those things.
That is harsh
Frankly purpose of government is not make profit.
Yes, some tweaks can be expected in scheme. but I seriously think govt came up with flying colours with this scheme. Just look at the subscription numbers and you will see how much money govt was successfully able to divert from physical gold. Which was the original purpose of issuing SGB. (and not getting low cost funds for govt)
Had these bonds been not there, lot of this money would have gone in buying physical gold, deteriorating our Current Account Deficit.
Why would they do that?
Even otherwise, there is no price-risk, right?
Because, in the worst-case scenario RBI can
simply “print monies” to repay SGB holders on maturity. (leading to inflation, which is what trying to buy gold using forex would have lead to anyways)
Atleast, with SGB one creates an opportunity for some economic growth in the meantime.
In a sense, the whole world is a Ponzi scheme.
With future generations left to take care of the current.
A key difference being that
there is some fundamental development/growth over the years
that sustainably adds some intrinsic value to the participants,
and makes it worth to continue with the scheme. (in this context, the “scheme” being a sovereign nation and its currency).
This is very apparent in times of extended draw-downs,
during which even entire nation economies can default.
In that sense, WW-III is already on. With nations trying to outdo each other.
It is just that the battlefields are economic in nature.
). Is it losing money on every SGB bond?
