Investors flock to Sovereign Gold Bonds despite price rises, FY24 sees record subscriptions

Investors seem to have shrugged off price rises to put money in sovereign gold bonds (SGBs).

Their preference for paper/demat gold is highlighted because 30 per cent of investments in SGB units issued since 2015 were made in FY24.

This is despite the issue price of an SGB going up 2.33 times from ₹2,684 per unit at the first issuance on November 30, 2015, to ₹6,263 per unit at the last issuance on February 21, 2024.

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The total SGB units subscribed (in grams/gms) by investors since 2015 stood at 146961529 gms/ 1,46,961.529 kilograms/kgs.

Of this, 44,335.778 kgs were subscribed in FY24, up about 3.62 times compared to FY23. This is the highest subscription in a financial year since the inception of the SGB scheme about eight years ago.

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors pay the issue price in cash, and the bonds will be redeemed in cash upon maturity. The Bond is issued by the Reserve Bank on behalf of the Government of India.

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Persons in India, as defined under the Foreign Exchange Management Act of 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities, and charitable institutions. Under SGB, an investor/trust can buy 4 Kg/20 Kg worth of gold in a fiscal year.

“The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest (2.50 per cent per annum).....,” per RBI FAQs on the scheme.

If the market price of gold declines, there may be a risk of capital loss. However, according to the central bank, the investor does not lose in terms of the units of gold which he has paid for.

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Madan Sabnavis, Chief Economist, Bank of Baroda, said: “We have seen that the demand for gold has gone up from all quarters – central banks, exchange-traded funds, and even individuals. So, those who are pure investors don’t want to get into the hassle of physically buying gold. Therefore, they are going in for SGBs.

“As price of the asset goes up, there will be greater demand.....Today, the demand for physical gold is increasing. So, it makes sense to move one category of investors away from physical demand. By doing so, the pressure on imports from this route is reduced to an extent.”

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