Sovereign Gold bonds can save up to $2 bn of metal imports

Sovereign Gold bonds (SBGs) provide a good alternative for investors and if subscribed fully in the first year it will result in a saving of USD 2 billion on imports of the precious metal at current prices, says a report.
According to Japanese financial services firm Nomura, SGBs provide a good alternative for gold investors as these are sovereign backed and also provide a nominal rate of interest.
"If the scheme is fully subscribed in the first year, then it will represent 27 per cent of the 2014 investment demand and would result in a saving of USD 2 billion on gold imports at current gold prices," Nomura said in a research note today.

In 2014, total investment demand for gold moderated to 180 tonnes from an average annual demand of 345 tonnes from 2010 to 2013, it said.
The government intends to cap the amount raised through SGBs to 50 tonnes in the first year and initially is not planning to hedge against the risks.
SGBs will be issued in lieu of money, linked to the price of gold and issued by the Reserve Bank of India on behalf of the government.

Banks, non-bank financial companies (NBFC) and post offices will be able to collect money and redeem bonds on behalf of the government.

SGBs will be restricted to resident Indians with an annual cap of 500 grams per person.
The bonds will be issued in denominations of two, five and 10 grams of gold or other denominations with a minimum tenor of five to seven years.
The rate of interest will be linked to the international rate for gold borrowing but with 2 per cent as the indicative lower limit and interest rates will be paid in terms of grams of gold.
On maturity, the investor will receive an amount which is equivalent to the face value of the gold in INR terms.