India’s Gold Bond Scheme: A Failed Bet on Paper Gold
In 2015, the Indian government launched the “paper gold” bond to reduce borrowing costs and lower debt issuance interest. However, as gold prices soared, this gamble ended disastrously, and India became the world’s biggest loser in the gold short trade.
Background: Putin rejects Trump’s call for a full ceasefire, Israeli airstrikes on Gaza result in over 400 deaths, and safe-haven funds rush into gold, pushing prices to a new high of $3,040.
Further context: Putin agrees to a conditional ceasefire with Ukraine, Trump’s tariffs hit U.S. stocks, and Bitcoin briefly falls below $80,000 before rebounding.
The global economy, affected by Trump’s tariff war and various policies, raised investor concerns about inflation and economic uncertainty. However, this also pushed gold prices to new highs in March, surpassing the $3,000 mark.
Tai Wong, an independent metals trader, commented last week:
“Gold hit a new high after Powell’s speech, soaring to a record level, with stocks and bonds also seeing gains. Gold prices have surged above $3,000 and are currently in a bull market. Due to increased uncertainty and rising inflation concerns, gold prices are expected to continue rising.”
Gold Bond Strategy Falls Short
While gold investors worldwide celebrate, one country cannot share in the joy.
In 2015, the Indian government launched a plan it thought was “smart”: issuing “Sovereign Gold Bonds” (SGBs) backed by the government and denominated in gold. The initial strategy was as follows: Indians love gold, so rather than letting them buy physical gold, why not let them buy “paper gold”?
These bonds were priced in grams of gold, with an annual interest rate of 2.75% (later reduced to 2.5%), and were to be redeemed by the government in rupees at market value at maturity. The Indian government believed this would not only meet the public’s gold demand but also reduce borrowing costs (at the time, Indian government bond yields were nearly 8%) and reduce gold imports, easing pressure on foreign exchange reserves — a perfect solution!
At the time, Indian finance officials reasoned that if gold prices rose, although redemption costs would increase, they would still be lower than typical government bond interest payments. If gold prices fell, it would be even better. More importantly, they hoped to reduce gold imports and ease the current account deficit. However, the dream turned into a nightmare as the reality of the situation set in.
Gold Prices Skyrocket, India Faces Massive Losses
After the scheme was launched, international gold prices began to soar. From $1,500 per ounce at the end of 2019, it has now surpassed $3,000, continuing to rise. This left the Indian government in shock. According to The Economic Times, a batch of gold bonds issued in March 2017 recently matured, and the redemption price for 1 gram of gold reached ₹8,600 — three times the issuance price! Investors were thrilled, but the Indian government was bleeding.
What’s worse, the Indian public’s enthusiasm for physical gold has not waned. Over the past decade, India has imported an average of $37 billion worth of gold annually, higher than before the plan was launched! In 2022, the Indian government, desperate, raised gold import duties to 15%, but the result was that domestic gold prices became more expensive, increasing the losses during bond redemption. Last year, the government hastily reduced the duties to 6%, but gold prices continued to rise.
Debt Grows Like a Snowball
As of now, the Indian government has issued 67 batches of gold bonds, totaling 147 tons of gold, with another 132 tons waiting to be redeemed. At today’s gold prices, this amounts to ₹1.2 trillion (approximately NT$456 billion) in liabilities. The final batch of bonds will mature in February 2032, and if gold prices continue to rise, the debt burden will become even greater.
Market Reactions and Future Outlook
In the short term, the Indian government’s policy failure has had a subtle impact on the gold market. On one hand, the government may continue to adjust gold import duties to reduce losses. On the other hand, investors’ confidence in gold has surged, potentially pushing gold prices even higher.
Overall, this “gold fiasco” has given the Indian government a profound lesson: in financial markets, there are no sure bets, and even the smartest plans cannot withstand the unpredictability of the market.
As for the future of gold prices, how will the Indian government handle this money pit? Let’s continue to observe.
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