The sharp decline of 36 per cent in gold demand in India in the March 2020 quarter, as revealed in the latest report of the World Gold Council, bodes well for the country’s external account. But the intense volatility in equity and bond markets has made investors gravitate towards gold over the past two years, and the Centre should ensure that it provides such investors viable options to invest in non-physical gold such as gold exchange traded funds and sovereign gold bonds. There has been a structural decline in jewellery demand in India over the past decade, caused by elevated gold prices as well as shifting preferences of the population, away from traditional modes of adornment. Gold jewellery demand in 2019 was 9 per cent lower than in the previous year. Interestingly, demand for gold bars and coins has also been declining and was 10 per cent lower in 2019 compared to the previous year. Higher scrutiny by the government and the difficulty in storing physical gold seems to be pushing investors away from physical gold towards paperless forms. This shift ought to be encouraged, as it can lead to higher transparency and lower tax evasion.

With the Covid pandemic increasing the demand for safe haven assets, gold has managed to deliver a sterling 48 per cent return in rupee terms over the past one year. The yellow metal has been surging since 2019, thanks to the escalation in the US-China trade war. The floundering global economy along with the negative impact of the large stimulus spending on currencies, is likely to keep the demand for gold strong. But despite the rally, demand for gold bars and coins declined 16.5 per cent in March quarter this year, compared to last year, while demand for gold ETF increased 31.4 per cent. Also, the sovereign gold bond issuances this year have found good interest. But the liquidity in secondary market for both gold ETFs and sovereign gold bonds is quite low, resulting in poor price discovery and hassles to investors who wish to sell these instruments on exchanges. While sovereign gold bonds can be sold back to the RBI, it is possible only when the buyback window is open. The Centre can consider mandating market makers in the SGB and gold ETF counters to increase liquidity.

Also, while selling SGBs is comparatively easier, purchasing is much more difficult for retail investors, as most brokers do not facilitate this. This is because inter-depository settlement is not completely in force in this security. It may help if the regulator looks into this issue and gives the necessary directions to exchanges, clearing corporations and depositories to address the problem. Since SGBs are a superior option compared to other gold investment routes, due to the interest paid to the holder and the sovereign guarantee, the Centre should do all it can to make this instrument more attractive.

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