Long-term gold investors should convert their gold ETFs to gold bonds.

 

The Union Cabinet has cleared the new gold monetisation scheme and gold bonds and both are expected to be operational before Diwali. However, the interest rates are still not known.

The gold monetisation scheme is for investors who hold gold in physical form. They can now deposit a minimum of 30g, unlike earlier where they had to invest a minimum of 500g.

However, the new version has not found favour with the experts. This is because the gold ornaments will be melted and converted to bars before being accepted as deposits. The scheme may be a nonstarter because consumers will not give up their gold jewellery so easily. However, investors who hold gold in bars or coins should consider participating in it.

Investors, on the other hand, may lap up the gold bond scheme because one can invest in them by paying cash. An individual can invest in up to 500gm of gold. The bonds will be issued in demat form as well. Though the duration of these bonds will be 5-7 years, they will be listed so that investors can exit before maturity. Investors should note that this is a new instruments and therefore, there is no guarantee that there will be enough liquidity in them.

Gold bonds can substitute other in struments linked to gold. For example, the gold ETF will only track gold prices and not generate any positive rate of interest. On top of it, you also have to pay an asset management fee for owning them. So it makes sense for gold ETF investors to convert their holding to gold bonds. However, gold ETFs may score on liquidity.