Now Bertie is quite chuffed that he owns Sovereign Gold Bonds (SGBs). What makes him even more chuffed is the fact that he bought a hefty portion of them in early 2024—in what may turn out to be the last tranche of any such issuances. In his mind, he’s the fellow who slips into the metro compartment just as the doors close. Played in slow motion, it’s a very James Bond sort of image.
Bertie was, therefore, extolling the virtues of SGBs to his economist friend Ron.
“If you want to own gold, you will not find a better instrument than SGB anywhere in the world,” declared Bertie with the zeal of a man convinced.
Like most good economists, Ron was not impressed by mere superlatives. He folded his arms and asked, “Why do you say that?”
The two have known each other for a long time, allowing to anticipate this question and have already prepared an answer.
The allure
“Pays interest. Is guaranteed by the sovereign. Tax-free at maturity. Reasonably liquid in case you need the money and no jhanjhat of storing physical gold.”
He was quite pleased that he had not only managed to remember all the selling points of SGBs but had also reeled them off bullet-point style like he had seen his private banker do. But he wasn’t done yet.
“And Ron, you know what? SGBs have outperformed even .” He paused for effect and dropped the final bullet point, “Scarcity premium.”
“That’s impressive,” agreed Ron, nodding. Bertie smiled as if he had just aced a rationale writing test.
“But who has the gold?” Ron asked calmly.
Bertie’s smile faltered. “What do you mean, who has the gold?” Bertie shot back, “The sovereign!”
Ron sighed, unfolding his arms with the air of a man about to explain arithmetic to a slightly slow child. “Yes, but who really holds the gold?” Bertie did not know the answer. “Somebody must,” he muttered, trying to feign the nonchalance of a man who cannot be bothered with such trivialities.
Ron ignored him and continued. “The bonds are issued on behalf of the Government of India, which does not actually own any gold. Yes, the Reserve Bank of India does own gold as a part of its reserves—but that’s not the same as the government owning it. Also, repaying the SGBs is not RBI’s job; it is the government’s.”
“But can’t RBI just hand the gold over to the government?” asked a worried Bertie, scrambling for a solution.
“That’s hard to imagine, Bert. Regulation prohibits any direct dealing between the government and RBI, and if the central bank were to still go ahead and do it, that would erode the bank’s credibility.”
Bertie frowned. “So should I be worried, Ron?”
Ron dropped his professorial tone and spoke as a friend again. “Not really, Bert. With SGBs, the is the same as with any normal government security. The assumption that the government will repay its debt is sound. No reason to lose sleep on that.”
He added, “And compared to the total public debt, the value of outstanding SGBs is a drop in the bucket—even with soaring gold prices and future appreciation. So, nothing very concerning there, either.”
Bertie smiled again and began to take his leave, newly reassured. He has since resolved to sing paeans to SGBs to anyone who cares to listen, because to keep that precious price premium over gold prices alive, they will need a brand ambassador.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.