Gold bond sales gain momentum in India's second wave of Covid-19 infections

Lockdowns to contain the disease have eased, but still many customers are putting their money on such instruments.

Compared to the first wave of Covid-19, the sale of gold bonds during the second wave, with less stringent lockdowns, has been high, indicating the rising popularity of the instrument.

In the first wave, the lockdown was nationwide and strict. As a result, jewellery shops and even e-commerce sites were not open for gold sales. Both gold exchange-traded funds (ETFs) and sovereign gold bonds (SGBs) were among the options for buyers.

Now even as lockdowns are fewer and physical gold buying is an option, sales of SGBs in April-July 2021 were 12 tonnes, despite the July month Series bond sales being a little weak compared to those of July 2020.

So far, bonds worth more than 74 tonnes have been issued since the first tranche in November 2015. The outstanding in gold ETFs is a little over 30 tonnes since 2007, when they were launched.

Sales in April-July 2021 so far are higher because of the Akshay Tritiya in May, when gold bonds of 5.3 tonnes were sold. Sales in the two tranches of bonds issued in May 2021 were 7.2 tonnes.

“SGB is now rated as the best digital gold product in the country. An increasing number of customers across geographies and age groups makes it the best way to invest in this asset class,” said Shekhar Bhandari, president and business head, global transaction banking, Kotak Mahindra Bank.

The reason, he said, is that the Akshaya Tritiya response to the physical market for gold coins was not good but the trend in general is set for bonds.

“Expect the digital trend to strengthen over the years. Being secure, simple, and safe and with guarantees from the government make it unbeatable. After the subdued Akshay Tritiya we expect big (sales in) Diwali. Gold will significantly attract investors in 2021 and 2022,” Bhandari said.

Bonds are preferred instruments in gold buying because they are also sold at a discount to the market price. Besides, they earn 2.5 per cent per annum returns on their investment value, and the returns are free from long-term capital gains tax for individuals if the bond-holder remains invested for the full tenure of eight years.

The average annual demand for SGBs is about 10 per cent of physical gold investment demand but in the Covid age it is high. However, the government has been looking for much higher sales.

“Gold has always been a financial asset but gold bonds and other digital forms of gold investment have democratised the market with all groups of investors getting attracted,” said Chirag Sheth, principal consultant, precious metals, South Asia, Metal Focus.

However, “with SGBs’ increasing popularity there is a need to develop a vibrant and liquid secondary market for bonds to realise its full potential. Currently it’s secondary market is not liquid,” he said.