Launched in November 2015, the SGB scheme aimed to reduce physical gold imports by offering a paper gold investment alternative. The SGB scheme was introduced at a time when gold prices were low and flat, providing the Government an opportunity to kill many birds with one stone (SGBs). But the same scheme has now become a burden for the Government as Gold prices have spiked.

The Government Does Not Buy Physical Gold Against SGB Issuance

• Unlike Gold ETFs or physical gold-backed instruments, SGBs are not backed by physical gold purchases.
• The government issues SGBs as a form of debt—it collects money from investors and promises to pay back the gold value at maturity, along with 2.5% annual interest.
• Since no gold is actually bought, the government does not benefit from any appreciation in gold prices.

The government stopped Sovereign Gold Bonds because gold prices rose much more than expected. This meant they had to pay both the high price appreciation and the yearly interest, making it too costly to continue.