Indian gold bond savers nearly triple their money

Indians who bought Sovereign Gold Bonds in November 2021 can redeem them on November 2 at 14,167 rupees per gram, the Reserve Bank of India has announced — against an issue price of 4,765 rupees. Offline subscribers gain 197.31 percent; those who bought online, with the 50-rupee-per-gram digital discount, gain 200.47 percent. On top of the capital gain, holders have collected fixed interest payments throughout the bond's life.

The instrument is unusual among government savings schemes in that the state, not the saver, carries the commodity risk. Sovereign Gold Bonds are government securities denominated in grams of gold, issued by the RBI on behalf of the Government of India. The redemption price is set as the simple average of 999-purity gold closing prices over the three business days before redemption, published by the India Bullion and Jewellers Association. The rules allow premature redemption only after the fifth year, and only on an interest payment date — which is why the 2021-22 Series VII tranche, issued on November 2, 2021, becomes redeemable on November 2, 2026.

What the saver avoided is as important as what they earned. Physical gold in India normally arrives wrapped in costs: import duty, jewellers' making charges, storage, insurance. A buyer of jewellery in November 2021 paid a premium over spot and owns fewer effective grams than the label suggested. The bondholder paid spot, in effect, held paper, and captured the full price move without storing anything. The design also serves a policy purpose — gold demand is satisfied without a single gram crossing the border, which matters for a country that imports most of its bullion.

The flip side sits on the treasury's books. The government borrowed at a fixed rupee interest rate and promised repayment denominated in gold; when gold nearly triples in five years, the state pays out roughly three rupees for every one it collected. Savers got an instrument that beat inflation by an enormous margin — a rarity for a retail government scheme anywhere. The cost of that generosity is borne by the same government that designed the bet, and it only looks generous because the bet went the savers' way.

The redemption price was fixed from gold's closing prices on October 28, 29 and 30; the bonds were issued five years earlier, to the day, on November 2, 2021.