Indian investors hold gold bonds, expecting price rise

Many investors in sovereign gold bonds (SGBs) are choosing not to cash in early, even though they have made significant profits. They believe that the price of gold could reach ₹1 lakh per 10 grams due to ongoing global issues, including trade tensions and conflicts in Europe and the Middle East. Data from the Reserve Bank of India (RBI) indicates that only about half a tonne of gold has been redeemed from eligible SGBs. These bonds were first issued in 2015 and have an eight-year term, with the option for early redemption after five years. Currently, bonds issued between May 2017 and March 2020 qualify for early cashing. Experts suggest that many investors are confident that gold prices will keep rising. Surendra Mehta from the India Bullion and Jewellers Association noted that people are holding onto their investments despite the strong returns. He advised that it may be smarter to redeem the bonds and invest in fixed deposits, which could offer higher returns than the bonds' annual coupon of 2.5%. Investors also earn interest on their bonds while holding them, which helps offset potential declines in the gold market. Rising gold prices have increased the government's liability related to these bonds. However, the RBI has been purchasing gold to strengthen its reserves, which helps mitigate this liability. As of January 2025, India holds 879 tonnes of gold, increasing its reserves significantly over the past eight years. If gold prices drop due to changes in global economic conditions, the liability from these bonds might decrease. Financial experts believe that geopolitical instability is keeping investors interested in their SGBs for now. Investors who bought SGBs in 2017-18 have enjoyed returns that beat those of the stock market. The average cost of the bonds was ₹2,951 per gram, while the current market price stands at ₹8,844 per gram, leading to impressive annual returns. Since the issuance of SGBs stopped in February 2024, there has been a notable rise in investments in gold exchange-traded funds (ETFs).