In the current fiscal year so far, six tranches of SGBs have been announced. Over the last five tranches, SGBs worth 3.1 tonnes have already been sold. This is in contrast to last year, when only three tranches worth 1.37 tonnes of SGBs had been sold till Diwali.
The popularity of SGBs can be attributed to the diminishing sentiment towards profit-booking from gold held in the physical form. This is because in gold bonds, there are annual interest rate and discount offers, besides the option to buy in demat.
In the Budget presented on July 5, the finance minister hiked import duty on gold to 12.5 per cent from the earlier 10 per cent. This affected fresh demand as the domestic price of gold headed north. However, given that the levy led to an increase in domestic prices, those who had bought gold earlier (including SGBs), found themselves richer by 2.5 per cent immediately after the Budget.
The import of gold after the Budget saw a sharp decline, but unofficial imports increased, suggest industry experts. In three months following the Budget, hardly 85 tonnes of gold was imported. In April-May, unofficial imports saw a dip on account of the increased vigilance during general elections. Smuggled gold after the Budget was selling in the market at a discount of Rs 1,400-1,800 per 10 grams, over the cost of officially imported gold.
The rise in prices of gold was followed by huge offloading by jewellers who had imported earlier. Simultaneously, unofficially imported gold was also released into the market. As a result, gold was trading at a steep discount as compared to the cost of imports.
In September, gold was trading at a discount of Rs 1,300-1,350 per 10 grams. Consumers selling old jewellery to cash in on the rally, only added to the supply. In the second quarter of the fiscal year, sale of old jewellery is estimated to have crossed 100 tonnes, which was likely a record high.
Globally, gold purchase by central banks has been very good. According to World Gold Council data, it stood at 651.5 tonnes last year — highest in the last 50 years. This year, it had already crossed 400 tonnes by the end of August. Central bank buying should be taken as a signal by investors.
Kishore Narne, head (currency and commodities), Motilal Oswal Financial Services, said: “We expect the positive momentum for gold to continue, but the pace of rally could get measured.”
He sees some moderation in prices once the trade war fears ease, but “until Rs 35,500 is held, we remain bullish and expect it to rise more to test its previous highs of Rs 39,500, followed byRs 41,500 over the next 12 months”.