India’s finance ministry proposed an innovative solution: to secure low-cost borrowing by offering returns tied to luxury items. This strategy aims to help the nation reduce its expensive reliance on gold. By doing so, Indians can indulge their strong desire for gold by investing in something even more dazzling.

It is increasingly clear that India’s 10-year-old sovereign gold bond program has become a $13 billion unhedged liability for the government, weighing heavily on its finances as gold prices soar without indication of a decline.

Ultimately, it is the taxpayers who will bear the burden of compensating bondholders. This outcome was not the intended purpose of the program. Initially, it was established that this specialized debt would offer a 2.75% coupon rate, which was later adjusted to 2.5%.

On the surface, everything appeared logical. With the eurozone recovering from the threat of a chaotic dissolution, the global demand for safe-haven assets was declining. For instance, if an individual purchased 1 gram of metal-linked bonds in November 2015 for slightly more than 2,500 rupees, equivalent to approximately $38 at that time, even if New Delhi needed to redeem the bonds at a 50% higher rate—3,750 rupees—the borrowing expense would still be lower than the nearly 8% yield associated with standard government debt.

Nevertheless, almost all aspects of that assumption proved to be incorrect. Initially, global prices surged, increasing from approximately $1,500 per ounce in late 2019 to $3,000 today. The inaugural bond matured at more than twice its original price, rendering it an expensive method of financing. Additionally, the widespread enthusiasm for bullion persisted despite its rising costs, with average annual imports remaining at $37 billion over the last decade. In an effort to curb this demand, New Delhi increased customs duties to 15% in 2022.