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.
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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.
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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.
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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.
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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.
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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.
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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.
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Yeah I thought so as much. Thanks
So it’s technically a “fiat gold” right? Backed by a promise and nothing else.
Yes, The underlying asset is the Govt. promise to pay you the current price of Gold. Sovereign guarantee.
Some investors have a little issue with SGB that Gold is seen to diversify and hedge risks because you have a contrarian view with the Govt and economic policies. And in adverse cases, you can back on the gold because it is an international currency. But going the SGB route is like you take fire insurance for your house from the same company that can cause a fire in the first place. According to that set of investors, this is defying the ideal principles of diversifying.
Every asset class has pluses and minuses. Just that one should be aware of what he is getting into.
I recently read an article from Arthapedia (Wikipedia-like website maintained by Indian Economic Service) about their plan to manage risk associated with SGB. It says:
Gold Reserve Fund is a fund created by the Government of India to take care of the risk associated with its two schemes – Gold Monetization Scheme (GMS) and Sovereign Gold Bonds Scheme (SGB)– due to an increase in gold price.
Gold Reserve fund is created by depositing the notional savings enjoyed by the Government in the costs of borrowing from GMS and SGB, as compared with the existing rate on government borrowings.
This doesn’t look sustainable, especially considering a situation of falling interest rates(less inflow into the fund) and rising inflation (more outflow from the fund).
And they don’t seem to have a well defined plan if the above solution didn’t work out well. 
The Gold Reserve Fund will be continuously monitored for sustainability. As per the present provisions, the gold deposit will not be hedged and all risks associated with gold price and currency will be borne by the Government of India through the Gold Reserve Fund. The position may be reviewed in case ‘Gold Reserve Fund’ becomes unsustainable. The detailed guidelines on the operation of the GRF are awaited.
The continuous monitoring can only be done with current gold prices. By the time it looks unsustainable, they already owe tranches maturing across 8 upcoming years.
When I watch movies related to the 2008 financial crisis, I used to believe my country is well regulated and there is no scope for such financial disasters here. But now I’m being sceptical.
Am I missing something or being drawn too far from reality?
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I think you are seriously over reacting here. The assumption that gold prices will continue growing the way it has grown in last one year is unrealistic.
Historically gold (or for that matter any commodity) has a boom cycle followed by long period of steady rate of even drawdown. So over a long period returns are not as high as it might be in 1-2 years.
Assume your worst fear comes true. What is the amount we are talking?
Total gold bond issued till date is around 68 tonnes roughly Rs. 33 thousand crores at today’s price. Compare this with:
- India’s total govt borrowing is around 147 lakh crore
- Only this year govt plans to borrow additional 12 lakh crores
- This year alone govt has budgeted interest payment around 8 lakh crores
- RBI has physical gold reserve of around 668 tonnes (10 times of SGB)
Frankly, the SGB is just a tiny part of govt borrowings and no matter how much loss govt takes on it, it still won’t matter.
There are lots of places where we have regulatory issue which can cause a financial disaster. But SGB won’t be it to worry your sleep on.
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First govt has not to pay more interest on it. Generally it is 2.5 % while for Regular GSecs govt has to pay around 7-8% which is 2 times more.
Second, returns on Gold bonds are linked to international market so government is free from any risk associated with its return.
Third, Regular bonds are released to fulfill some specific purposes such as road construction, Shipyard construction which might turn into a loss making project but still govt has to pay fix rate of interest while in Gold bonds it is not so.
So Gold bonds are first choice for any go to raise funds.
Any other countries are issuing gold derivative bonds like india ?
There is scheme like India’s Gold Monetisation Scheme offered in Turkey -
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Yes, but the CAGR of gold price in INR for the past 48 yrs is 12.15%. Add 2.5% to that and you get a whopping 14.65% for an 8 year bond. Just compare this level of interest vs 10yr yield graph.
Gold price chart I generated for this study.
Arthapedia article clearly says it is not to be used to hedge.
As per the present provisions, the gold deposit will not be hedged and all risks associated with gold price and currency will be borne by the Government of India through the Gold Reserve Fund.
I apologise if I drift too far. But I’m not saying the sky is falling. I’m just disappointed to see the Gov taking up this unsustainable course of action. Afterall, the cost of unsustainable or inefficient moves of Gov are borne by taxpayers.
Proceeds received aren’t put into any productive purpose. All of it goes into Gold reserve fund and paying interest. Quoting Arthapedia.
Gold Reserve fund is created by depositing the notional savings enjoyed by the Government in the costs of borrowing from GMS and SGB, as compared with the existing rate on government borrowings.
(I appreciate and thank everyone who contributed to this thread making it a decently exhaustive information on the topic, for many people to see)
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This is true if it was backed by physical gold. But it just isn’t.
This money goes nowhere, but to Gold Reserve Fund, to only manage risks associated with the SGB and Gold monetization scheme. I have cited the proof in my recent past comment.