Gold fever shows no sign of abating. No matter how high the prices of the ‘barbaric relic’ go, investors are convinced that it’s still a good investment. However, if some talk in Delhi is to be believed then the Government of India is considering a solution to this which itself is a rather risky play on gold prices. Apparently the government is considering offering some kind of gold bonds for sale.
The phrase “gold bond” has meant different things at different times, but this time it simply means a bond (or a deposit) that will match the returns of gold. From the investors’ point of view, it will be exactly like investing in gold. You invest in this instrument and when you redeem it, your gains are exactly what they would have been had you been buying or selling gold.
The idea is that this way, one, the money won’t be spent on importing gold and two, the government will have a new source of borrowing without squeezing the existing channels. Together, the two aspects are supposed to represent a step away from a gold-centric savings system to a financialised one.
Fortunately, this idea is unworkable and should not be workable. It’s unworkable because the people who buy physical gold want physical gold. They want to hold the stuff in their hands and wear it around their fingers and throats. If that weren’t the case then after Gold ETF funds would have had rather more than the fraction of a per cent of the gold market that they have now. After all, Gold ETFs offer investors much the same deal as government’s gold deposits will do. In fact, the funds are open-end while the deposits may well have a lock-in.
All in all, such a deposit scheme will have a negligible impact on gold imports but will put the government o the hook in case of further sharp rise in gold prices. This love of gold is very deep and has developed over some thousands of years. It will take more than a deposit scheme and few ETFs to die away.
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