Gold bond is the best option for investing in gold as it gives returns linked to the price of the yellow metal plus an additional interest. Yet the recent gold bond issue fell flat on its face, garnering a mere ₹150 crore. A post-mortem of the manner in which the issue was planned and executed shows that the Centre has a long way to go in marketing financial products successfully. Unless it gets its act together before the next tranche of gold bonds is announced, its aspiration of moving Indians away from physical gold will remain a dream.

So what went wrong with the issue? One, most banks were not prepared for it. A meeting of the bankers and distributors was called only a few days before the issue opened to explain the operational details. Banks were given an extremely short window to get their sales force ready and to negotiate commissions with sub-agents. The other snag in the scheme was the pricing. The Centre announced the price for the gold bond five days before the issue at the previous week’s average of ₹2,684 per gm. Given the extremely volatile gold market, the government should have given only an indicative price for the offer and fixed the bond’s price only after the close of the offer. Between the day the price was announced and the day the issue closed, gold prices in the domestic market dropped by 5 per cent. It would have been obvious to any prospective investor that taking exposure at the price fixed by the government was a losing proposition. With just 2.75 per cent interest per annum, and market prices already down 5 per cent, the bonds would have made money only from the third year.

It is not as if there is a lack of demand for the yellow metal. India’s demand for gold bars/coins was up 6 per cent over last year in September quarter, higher than China’s 54 tonnes. The poor response to the gold bonds is entirely of the government’s own making.

Rajalakshmi Nirmal, Chief Research Analyst

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