Government announces 1st tranche of Sovereign Gold Bond

Sovereign Gold Bonds in India

The government of India has just announced the first tranche of sovereign gold bonds (SGB) for FY24 at a price of Rs5,926 per gram. Sovereign Gold Bonds (SGB) have caught the fancy of Indian investors from the time they were launched for the first time in the year 2016. Till now, there have been over 60 tranches of SGBs issued by the government. SGBs have been found to be attractive by Indian investors for various reasons. Firstly, these SGBs are linked to the price of gold, so it is like holding gold in non-physical form. 

Secondly, the government of India pays interest of 2.5% every year, which adds to the yields on the gold bonds. Thirdly, the SGBs are totally exempt from capital gains tax if they are held for the full tenure of 8 years. That substantially boosts the post-tax yield of sovereign gold bonds. Above all, it carries a sovereign guarantee. While the price of gold is still market determined, the government guarantee your holdings in terms of grams of gold and also the payment of interest on a periodic basis

Our focus here is not on the nuances of SGBs and its fit into an individual’s portfolio. That has been debated ad nauseam. The focus here is on some amazing facts about sovereign gold bonds since their first launch in the year 2016. Read on and find out the unseen side of sovereign gold bonds.

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10 unique truths about Sovereign Gold Bonds in India

Here is a quick look at 10 facts about sovereign gold bonds and for that we have taken the complete historical data from the RBI database. Some of the facts are really enlightening.

1. Did you know that from the time the government launched the Sovereign Gold Bond scheme in the year 2016, the government has completed a total of 63 tranches of Sovereign Gold bond issues. The ongoing issue of Sovereign Gold Bonds, which is open from June 19, 2023 to June 23, 2023 will be the 64th tranche of sovereign gold bonds. That gives us a fairly long history to look back upon and see some of the more interesting data points.
    
2. Did you know how many series of SGB issues were done in each of the previous financial years? Here is the break-up of the 63 SGB issues since its launch. 

Data Source: RBI

FY18 led the way with 14 SGB issues in the year followed by FY21 at 12 SGB issues and FY22 and 10 SGB issues.

1. Do you know how many grams of gold have been sold by the government through the 63 SGB issues till date? Till date, across the 63 SGB issues completed by the government, it has sold a total of 10,26,26,751 grams (10.26 crore grams) or you can say that the government has sold the equivalent of 1,02,627 KG of gold or you can even say that the government has sold approximately 103 tonnes of gold equivalent through SGBs. Why is this important?
    
2. To understand the importance of 103 tonnes of gold let us put it in perspective. Indian households are estimated to hold about 25,000 tonnes of gold in their homes and lockers. What the government has raised through SGBs in the last 8 years is about 0.4% of these gold holdings. But there is another perspective. The total gold bond mop up by the government since 2016 is worth Rs62,600 crore at today’s value. That would mean it has replaced purchase of physical gold to the tune of nearly $7.5 billion. That may not be substantial, but it has saved foreign exchange nevertheless for India.
    
3. How have the prices of the gold bonds moved. Out of the 62 prices changes over two successive SGB issues, in 26 cases the gold price was lower than the previous issue while in 36 cases, the gold prices were higher. The average accretion over the last 63 issues was Rs47 per gram.
    
4. A person who had bought 1 gram of SGB in each of the 63 issues in the past would have an average cost of Rs3,922 per gram. With the current rate of gold at around Rs6,100 per gram, that would amount to fabulous returns for the investors. Remember, this is over and above the 2.5% annual interest earned by the investor on gold bonds.
    
5. A total of 10.26 crore grams of gold equivalent were sold via SGBs in the last 63 tranches of the sovereign gold bonds. But which was the tranche that saw the maximum quantum of gold sold in a single issue? Among the top 3 issues of SGB in terms of quantum of gold sold; August 2020 SGB issue sold 63.5 lakh grams of gold, May 2021 issue sold 53.19 lakh grams of gold and the July 2020 sold 41.3 lakh grams of gold. Most of the big gold sales happened in and around the pandemic period, when asset class uncertainty was high.
    
6. What were the prices at which the largest chunk of the gold bonds was sold. The top 10 tranches in terms of sales accounted for a total of 3.95 crore grams or nearly 39% of all the gold bonds sold till date. There were 2 tranches in which more than 50 lakh grams of gold were sold, 8 tranches in which gold between 30 lakh grams and 50 lakh grams were sold 15 tranches in which gold between 20 lakh grams and 30 lakh grams were sold and 10 tranches in which gold between 10 lakh grams and 20 lakh grams were sold. On the balance 28 tranches, less than 10 lakh grams of gold equivalents were sold.
    
7. The average price of the top 10 tranches in terms of quantities purchased was Rs4,805 per gram. This is 23% higher than the arithmetic average of gold prices across the last 63 tranches at Rs3,922 per gram. Like in the case of equities, even in gold, some bullishness is a positive magnet to attract gold buyers. 
    
8. Finally, what about redemptions. The first tranche was issued in November 2015, so that would mature only in November 2023, which is still some time away. However, the government does offer a special redemption window for all the issues on completion of 5 years at the extant prices. Out of 63 issues, the government (through the RBI) has offered this special window in 22 of the tranches. However, the demand for redemption has been quite low. Out of the 10.26 crore grams of gold equivalent sold through SGBs till date, the total redemptions at the special window have been just about 13.02 lakh grams. In percentage terms, that is just about 1.27% of all gold bonds sold till date and 5.55% of the total gold bond sales in the first 22 tranches where redemption is available.

Gold has been on a consistent uptrend in the last 8 years and that has helped articulate demand. The real picture will emerge once gold becomes more volatile.

Content Source: RBI Website