 "Success of sovereign gold bonds could be a dampener for gold ETFs")
The sovereign gold bond scheme proposed by the government on Thursday has many takers. However, it could affect the gold exchange traded fund (ETF) segment, which is facing a difficult phase, with assets under management falling and hardly any fresh investments coming in.
Sovereign gold bond is a good scheme because gold investors will be able to take this route with returns higher than gold. Apart from gold price returns, they will also get a per cent or two extra per year, which is proposed to be offered to bond holders.
Nilesh Shah, a strong supporter of gold bonds and managing director of Kotak Mahindra Assets Management Company, said, “Investors will put money in gold sovereign bonds as the scheme proposed by the government is attractive. This scheme should have come much earlier, but better late than never.” He said in the past decade, India sent $280 billion out of the country to import gold, which otherwise would have been used for development. The amount is similar to foreign institutional investment in the country during the period.
Sovereign gold bond is a good scheme because gold investors will be able to take this route with returns higher than gold. Apart from gold price returns, they will also get a per cent or two extra per year, which is proposed to be offered to bond holders.
Nilesh Shah, a strong supporter of gold bonds and managing director of Kotak Mahindra Assets Management Company, said, “Investors will put money in gold sovereign bonds as the scheme proposed by the government is attractive. This scheme should have come much earlier, but better late than never.” He said in the past decade, India sent $280 billion out of the country to import gold, which otherwise would have been used for development. The amount is similar to foreign institutional investment in the country during the period.
There is one issue in the scheme, which worries some experts. According to a bullion analyst, “The government estimates it will be able to raise $2 billion in the first year but says the gold price risk as well as currency risk need not be hedged. This could be a big gamble.”
A banker dealing in gold said: “RBI has a natural hedge for currencies and gold with $350 billion in reserves.”
Unlike the gold monetisation scheme, where the primary objective is to monetise India’s massive stock of physical gold, the sovereign gold bond scheme intends to convert the investment demand for physical gold into paper demand. “In 2014, total investment demand for gold moderated to 180 tonnes from an average annual demand of 345 tonnes during 2010-2013.”
If the scheme is fully subscribed in the first year (50 tonnes as estimated by the government), then it will represent 27 per cent of the 2014 investment demand and result in a saving of $2 billion on gold imports at current gold prices. Additionally, since the bonds are part of the sovereign borrowing programme, they have to be kept within the fiscal deficit target (3.9 per cent of GDP in FY16). Regular government borrowing will come down by a similar amount. Overall, this scheme provides a good alternative for gold investors as these bonds are sovereign backed and also provide a nominal rate of interest,” said Sonal Varma, executive director and India economist at Nomura.
A banker dealing in gold said: “RBI has a natural hedge for currencies and gold with $350 billion in reserves.”
Unlike the gold monetisation scheme, where the primary objective is to monetise India’s massive stock of physical gold, the sovereign gold bond scheme intends to convert the investment demand for physical gold into paper demand. “In 2014, total investment demand for gold moderated to 180 tonnes from an average annual demand of 345 tonnes during 2010-2013.”
If the scheme is fully subscribed in the first year (50 tonnes as estimated by the government), then it will represent 27 per cent of the 2014 investment demand and result in a saving of $2 billion on gold imports at current gold prices. Additionally, since the bonds are part of the sovereign borrowing programme, they have to be kept within the fiscal deficit target (3.9 per cent of GDP in FY16). Regular government borrowing will come down by a similar amount. Overall, this scheme provides a good alternative for gold investors as these bonds are sovereign backed and also provide a nominal rate of interest,” said Sonal Varma, executive director and India economist at Nomura.
Fund managers of gold ETFs, however, need to worry because these bonds can replace ETFs. This is because ETFs deduct expenses from invested funds, while sovereign bonds will pay additional interest.
The government will bear expenses such as agents’ commission. An executive of one of the mutual funds running gold ETF admitted this. However, Chirag Mehta, fund manager (commodity) at Quantum AMC said, “There is a class of investors who will feel safe buying financial instruments backed by physical gold.
Hence, gold ETFs will also remain. However, the industry will have to find out growth avenues, including using jewellers’ network. Jewellers can accept gold units from investors, aggregate them and get that converted into physical gold.
The government will bear expenses such as agents’ commission. An executive of one of the mutual funds running gold ETF admitted this. However, Chirag Mehta, fund manager (commodity) at Quantum AMC said, “There is a class of investors who will feel safe buying financial instruments backed by physical gold.
Hence, gold ETFs will also remain. However, the industry will have to find out growth avenues, including using jewellers’ network. Jewellers can accept gold units from investors, aggregate them and get that converted into physical gold.