This Scheme is Beneficial for the Indian Economy. But not for the Indian Citizen!

Before we dive into the topic, lets have some insights about Gold as an Investment.

[Image No. 1]

Price of Gold in December 2005 was 500$. Price of Gold in November 2015 is 1134$. That is a
Compound Annual Growth Rate (CAGR) of 8.5%.

We have heard great stories from our parents and grandparents about the amazing returns they earned
on Gold in last 25 years. Lets give that story a reality check too!

[Image No. 2]

Price of Gold in January 1990 was 399$. Price of Gold in November 2015 is 1134$. That is a CAGR of
merely 4.3%.

Putting money in Fixed Deposits would have given them better returns.
Well, on the face of it, Gold IS NOT a great investment avenue, maybe its time you explain to your
parents how they lost money by buying and holding Gold.

Putting Money in Gold, in fact, ate up almost 87% of the money originally invested. How?
Inflation. This monster ate away their wealth. From 1990 up until now average inflation rate in India has
been around 8%. Which means, Value of INR 1,00,000/- in January 1990 is diminished to INR 12,436/- .
i.e. the Value diminished by a whopping 87% since 1990.

The Charts and Data clearly demonstrate that in the past 10 Years Gold has barely managed to beat
inflation.
In the last 25 Years, Gold has in fact given negative returns. [(-8%) inflation + 4.3% returns on gold] that
amounts to a (-4%) Return in the last 25 Years.

So much! For being called a Precious Metal.

What are the Primary reasons that we Indians buy Gold?

1. Gold purchased by Current Generation is rarely sold. Rather Gold flows down in our Country
from Generation to Generation. You may have heard the stories of how your mother is wearing
the necklace gifted by her mother, who in turn received the gift from grandmother; so on and so
forth. Each Generation adds a little more gold to the wealth and passes off to the next
generation. This accumulated Gold is highly liquid, meaning in times of crisis the Gold is
mortgaged to raise Capital and in extreme but rare case, Gold is completely sold out to prevent
further disaster. This is how we Indians use Gold to Hedge against bad times.

2. Gold is used to hoard Black Money. It can be purchased for and sold off for unaccounted cash.

3. Gold is considered an auspicious metal and is used to decorate temples and deities.

Thus, Gold is rarely used as an investment in our Country. It is rather used as Hedging Instrument and
has Emotional Value for us.

How do we accumulate Gold?

1. Jewelry is the most common form in which we accumulate gold. We wear, we gift, we rent and
more with Jewelry, but we rarely sell it.

2. Gold Coins & Bars, these are purchased from Banks or Jewelers during auspicious occasions.
They are mostly gifted to someone or the other, but rarely sold.

3. Gold Funds and Gold ETFs: These are Mutual Fund Schemes which generate returns that
corresponds to the returns provided by price of gold through, direct or indirect investment in
physical Gold. Gold Funds and Gold ETFs are relatively new investment vehicles that have been
introduced in the Indian Markets. None of these funds have been able to generate more than
4% CAGR in the past 5 years.

4. Sovereign Gold Bonds Scheme: since this is our Core Topic, we shall discuss the same in detail in
next point.

What are the salient features of the Sovereign Gold Bonds Scheme 2015?
 1. SGBs are government securities denominated in grams of gold. They are substitutes for holding
physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in
cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. The
bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip.

2. To curb the import of Gold, the Government wants You to purchase Gold Bonds rather than
Physical Gold. As per the Government, SGB offers a superior alternative to holding gold in
physical form. The risks and costs of storage are eliminated. Investors are assured of the market
value of gold at the time of maturity and periodical interest. SGB is free from issues like making
charges and purity in the case of gold in jewelry form.

3. The Bonds will be issued in denominations of one gram of gold and in multiples thereof.
Minimum investment in the Bond shall be two grams with a maximum buying limit of 500 grams
per person per fiscal year (April March).

4. The customers will be issued Certificate of Holding on the date of issuance of the SGB.
Certificate of Holding can be collected from the issuing banks/Post Offices/agents or obtained
directly from RBI on email.

5. The tenure of the Gold Bonds is 8 years, and redemption is allowed only after the 5th year.

6. The Sole Attraction of the scheme is that the Bonds bear interest at the rate of 2.75 per cent
(fixed rate) per annum on the amount of initial investment. Interest will be credited
semiannually to the bank account of the investor and the last interest will be payable on
maturity along with the principal.

7. Interest on the Bonds will be taxable as per the provisions of the Income-tax Act. Capital gains
tax treatment will be the same as that for physical gold.

8. On maturity, the redemption proceeds will be equivalent to the prevailing market value of
grams of gold originally invested in Indian Rupees. The redemption price will be based on simple
average of previous weeks (Monday-Friday) price of closing gold price for 999 purity, published
by the India Bullion and Jewelers Association Ltd (IBJA).

9. These Bonds are eligible to be used as collateral for loans from banks, financial Institutions and
Non-Banking Financial Companies (NBFC).

Our Opinion.

We have already established that Gold in itself is not an intelligent investment vehicle. Over the
long run it has given negative returns.

As previously observed, we do not sell gold so easily. Not unless, there is no other way to
survive. Gold is accumulated over centuries and passed on to coming generations. The SGBs has
a tiny tenure of 8 years. That beats our primary objective for holding Gold.
 The SBGs is also extremely illiquid, as opposed to Physical Gold. Although both forms of Gold
can be used as Collateral for obtaining Loans. This kills our next most important objective of
holding physical Gold: to liquidate in times of extreme distress.

Interest on SGB is taxable. The gains, if any, which You earn after redemption, are also subject to
Capital Gains Tax.

You will not be receiving Gold on redemption! You will receive only cash. Also 8 years is too
small a period to guarantee that Gold prices will rise sharply. As you can see in Image No. 2,
there was negligible price movement since 1990 till 2005. It was only from 2006 that prices
started rising. But since 2014 the trend seems to have reversed.

Fixed Deposits in India offer 8% Compound Interest (Pre Tax). 1,00,000/- Rs invested at 8% for
8 Years shall fetch You 1,85,000/- Rs. Lets compare this to Gold. 24Karat Gold in Mumbai costs
Rs.2,557/- per gram, and to beat the Fixed Deposit Returns, Gold will have to rise by 85% in
next 8 years to turn into Rs 4,732/- Which we think is highly improbable. So You are better off
investing Your hard earned Money in Fixed Deposits.

There is a bigger concern with the SGBs. The scheme is cannibalistic, meaning that if this SGB is
successfully implemented, it will cause Gold prices to fall, not rise. How?

India is the second largest Gold Importer. India imports about 800 to 1,000 tonnes of gold
annually. Total gold import in 2014 was $31.2 billion. ICRA expects a 5% drop in Gold Imports in
coming months due to the various Gold Schemes launched by Indian Government. If this
Scheme along with the Gold Monetization Scheme is successfully implemented, the Demand for
Gold will drop drastically. On the other hand, the Gold Reserves with the Government will rise.
Thus there will be Over Supply and Under Demand at international level; which will in turn halt
any upward price movement. Thus giving negative returns in the long run.

Notice carefully and you will discover something interesting. The World Gold Council is busy
promoting the idea that Gold is a good investment. Fund Houses and Stock Exchanges are busy
promoting Gold Funds and Gold ETFs. The RBI is busy promoting the Gold Bond Scheme. Your
Investment Advisor will be persuading You to buy Gold Funds/ETFs or Gold Bonds; if he also
owns a Jewelry Store he will persuade You that physical Gold is a good investment too! I hope,
You are able to catch my drift.

This is what Warren Buffet has to tell us about Gold:

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury
it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would
be scratching their head

As a general rule of thumb, remember: if You are the last person in the Investment Chain, there is a 99%
probability that You are being fooled. If something is really great and precious, it is not sold, it is held
and cherished; inversely if something is available for sale, only the insiders and the brokers make
money.

Blindly believing the advise of Sellers and Brokers who have vested interests, will be fatal for your
financial goals. Have your own study on various investment vehicles, know all of its pros and cons.
Read, read, read as much as you can, that will help you grow. If You lack time and energy to do the
exercise, find some independent consultant, who has your best interest in mind.

This is exactly where we come in the picture. We are not brokers, we do not earn commissions. Hence
we are not influenced by the industry. We have brutal and honest opinions based on thorough research
and analysis, thus ensuring Inevitable Gains for YOU!