All I can find are reasons why SGB is a great option from the investor perspective. I couldn’t find a convincing reason why Gov. is issuing this special type of bond apart from plain vanilla type.
To put it simply, why do SGBs exist?
Can someone please enlighten me?
One reason is to reduce the import of gold while increasing circulation.
For that purpose, they could just issue something like a Gold ETF right? The current model have poor liquidity, restricting the “circulation”.
And why reduce import of gold? To have better trade surplus?
Gold ETFs have equivalent physical Gold reserves. So it would not curb Gold imports. With SGB, you get a sovereign promise of price of gold to be paid while there is not physical gold being imported. Also, from another point of view, central Govt. is getting a loan from SGB holders at 2.5% annual interest rate only.
Just need more clarity on this. I thought to curb the import of Gold, SBI started the gold account where customers can deposit their physical gold, and they will give interest. This will defentely reduce the import. By raising Gold Bond, they are only getting money in INR and still need to convert it to USD to import. So how will this help.
Not backed by physical gold 
! Too bad they didn’t explicitly mention this.
On top of the promised 2.5%, they pay additional amount as per the gold price, which is unpredictable and out of their control right. Isn’t that risky for the borrower?
Not really, given that the borrower can keep borrowing to pay the lenders back. In other words: GoI can just issue more SGB and use their proceeds to pay off the redemption costs.
Stated purpose of SGB when it was launched by Govt was to wean away people from investing in physical gold for couple of reasons:
)Why not gold ETF or other means
Seems like you haven’t read any offer document where explicit mentions are made 
Having said that, by issuing SGB, RBI is taking gold price movement risk on its book. But RBI already has tonnes of gold reserve (which is necessary) so risk is kind of hedged.
For user it has govt of India guarantee. If that doesn’t fill safe then using Indian currency note should feel risky too
All in all, it is risky product for govt. (actual payout for initial SGB is much more than govt borrowing rate). But idea is if it can reduce gold import in long run and make money more productive, overall benefit to economy would be higher.
Hope this helps
Yes Gold monetisation scheme was also introduced to make gold lying unused more productive and reduce import.
As rightly said, govt is not buying actual gold to in proportion of SGB sold, to back it. They are getting INR which they are using it. And when SGB redeems, they are paying back INR.
Govt is taking price movement risk of gold on its book with a assumption that in long term it will not be more expensive than other borrowings and RBI’s gold reserve provides some edge.
Also, Govt/ RBI can import Gold when it is cheap and issue SGB when Gold becomes expensive. And funds collected from future investors can be used to repay the previous investors. Govt. gets a window of at least 5 years (one can prematurely redeem or encash SGB after 5 years only) to play. And Govt gets a loan at mere 2.5% to do such adjustments. SGB can change hands in the secondary market in the meanwhile increasing the circulation. And this can go on perpetual. And knowing the historic drawdowns of Gold, it is a risk indeed that Govt is taking that comes with its rewards.
Yes. Gold Deposit Account was for the purpose of increasing circulation where the Gold instead of sitting idle at your home is made to work. The Gold purity is checked and is melted and for that quantity and the equivalent price is mentioned in the Gold Deposit Account. You get 2.5% annual interest and Govt. adds that Gold to its Gold reserve.
As mentioned in my previous comment, with SGB, Govt gets a window of 5 years to decide when to import Gold strategically when it is cheaper in the international market, and when Gold gets expensive, issues SGB so that more investors participate and fund the Govt. A sovereign promise is all it is based upon.
FYI, for the first tranche of SGB issued in 2015 the issue price was Rs 2684 and since it has completed 5 years, it can now be redeemed at current Gold price Rs 4837. A profit of 80%. Where would Govt pay this from? Now you know how back to back in the past two weeks two SGB tranches were issued.
I think this assessment is too harsh. Hardly bonds for 900 Kg were sold in first tranche. I doubt even 20% of it would be applying for early redemption.
Govt. does not have to come up with two tranches just to fund such tiny redemption.
In fact in first tranche of may itself, bonds for almost 5300 kg of gold are stored.
While I agree govt will do some management and time the market, let’s not treat it as ponzi scheme, by implying that payout is being made by launching new bonds.
I could have used the word if I were to imply that. I stayed away from there. All i said was if you check past data, Govt has timed the market to issue new SGB e.g. last year during Aug, Sep SGB were launched when Gold was at its peak and then there was a dry spell for a couple of months and then again when inflation and second wave hit us, new SGB were issued. With history drawdawns of Gold being high-highs and low-lows, one should be careful of when to invest how much and for how long one can ride the tide along with Govt. That’s all I meant.
Well frankly for past 3-4 years, every year govt releases SGB calendar. In Apr-May for first half and sept-Oct for second half. This is happening transparently from 2018. You can check RBI website notification
Now coming to your charge of govt selling in Aug, Sep at peak last year. Notification for same was already made in Apr 2020 that tranche would be opening for first 6 months (again available on RBI website)
So unless you are saying that govt already knew in April 2020 that gold will peak in Aug/Sep 2020 and hence timed it 4 months in advance, I am not sure what to make of your charge.
Now, this historic chart of SGB issue price points from 2015 till May 2021
Govt did sell at high price in Aug/Sep but they also sold in oct, nov, dec, jan-21, feb and march and Now may at lower price point.
Basically in last 6 years govt has come up with 50 issues on an average every 1.5 months. Prices are varying as per gold price and govt has no role to play in it.
As individual investor you can always time the market, but frankly govt is just providing a transparent mechanism to invest in gold.
Let’s not blame govt for something that they are doing right.
Where am I blaming? I only added a word of caution to investors to study before they are get into it. Because the SGBs are sold at a discount on the secondary market. That too if someone is willing to buy your SGB. Trade volumes are less. Also unlike Govt, we don’t have a perpetual time frame. Hence I said so.
P.S. I do own some SGB. Some bought when it were issued and some were bought from secondary market.
Man you made a complete abut turn now. Let me quote your previous reply again:
Isn’t this blaming? especially when govt is declaring in advance calendar for both half of years? and issuing transparently based on that?
You might be just making casual remarks but for people reading it, they will loose confidence in product. That’s why I suggest caution
Well this is for 8 year investment in gold. It is never sold as a product to trade.
Govt is selling product with 8 years time frame with exit option at 5, 6 & 7 years. How is this perpetual? Can you make up your mind what exactly is your grievance here?
I will again repeat, lets not blame govt for something which for a change they are doing right.
I said this too in the same breath.
I said it to mean Govt can come up with new tranches to keep continuity. So it won’t end. So Govt has a bigger time frame to play. But for investors it may or may not be so. This point i was highlighting.
I understand your points well. I hope you too understand where I am coming from.
Just tell me one thing.
Were you aware that govt declares calendar for SGB issuance for both half of year in advance and issues SGB accordingly?
Tell me this and I will know where you are coming from.
I am aware of the dates RBI has released for SGB issue dates earlier this month for this year till September. I don’t know about beyond that. I am not aware of the background calculations basis which they determine the date of release. And I don’t know when do they choose to announce it. Like there is no fixed dates.
Yeah I thought so as much. Thanks
