Gold bond is defined as a bond that is denominated in grams of gold and whose payments are tied to the price of gold. These bonds allow investors to store gold in a dematerialized form and generate income. Gold bonds can be redeemed both in cash (depending on the price of a gram of gold on the day of payment), and in physical form, by returning the precious metal in kind.
These instruments are especially typical for the bond markets of Turkey (example Turkey, Gold Bonds 2.3% 5jul2024) and India (example India, Gold Bond 28apr2030).
In Turkey, gold bonds are issued by the Ministry of Finance for individual investors in order to diversify borrowing instruments. The reason for the introduction of this instrument is the love of the Turks for gold, which they used to keep in physical form and not benefit from it. Gold bonds, on the other hand, help to attract additional gold to the economy, which can bring income to the state. Turkey’s Gold Bond Program involves exchanging physical gold for two-year bonds with semi-annual coupons denominated in Turkish Lira and indexed to the gold price at the date of the coupon payment. At the end of the term, the gold is returned by the bondholder in physical form.
In India, gold bonds are issued by the Reserve Bank and allow individuals to invest in gold. This program aims to reduce the consumption of physical gold in India. The main feature of these bonds is their intangible form - the bonds are tied to the average gold rate at the time of purchase, but they are paid in national currency. Gold bonds have a fixed interest rate and they are exchanged for cash at the current price of gold. Thus, the investor has the opportunity to receive double income - both from the growth in the value of gold, to which the bond is tied, and from coupon payments in the amount of 1-2%.