All that glitters isn't gold

The government on Thursday announced its sovereign gold bonds for its citizens. But all that glitters isn't gold. The bonds issued may be a substitute for holding physical gold and investors too will be paid cash on redemption which would be anytime after the fifth year till the eighth year when the gold bonds mature.
 
However, in the current form this is the biggest marketing gimmick to raise money from public. In the name of gold the government will borrow money from public at a low rate of interest. The bond will hold a coupon rate of 2.75 per cent. This means for every Rs 100, investors will get Rs 2.75. The interest is also taxable. At higher tax bracket one will make close to Rs 1.92 for Rs 100 investment.
 
This isn't lucrative because there are many sovereign-backed products in the market that fetches more interest than the gold bonds. But the biggest concern is that the current gold bond is not currently backed by gold but only a gold promise. This means currently it's only a paper product.

If investors want to buy gold from the money they receive from the sale of bonds, it can easily put pressure on the government finances. This is because the underlying gold is not bought at the time of buying the bonds and this can put pressure when investors buy physical gold from the market.

If one argues that the gold bonds are investment product, then at the current rate of interest isn't lucrative.

The product could become lucrative if it is backed by an underlying rather than just gold promise.

The government has to create tail winds and not head winds to take care of their concerns on gold demand. Curbing demand is not the way forward but by creating supplies.