The fifth tranche of sovereign gold bonds (SGBs) issued by the RBI (Reserve Bank of India) for this financial year, opens today, August 9, 2021.
What’s on offer
The SGBs will be issued to investors at Rs 4,790 per bond. Each bond tracks the price of one gram of gold. A discount of Rs 50 is also on offer, if you apply using a digital payment mode. For such investors, the price is Rs 4,740 per bond. The price is arrived at by averaging spot prices of gold in last three days. The price at which the bonds are being offered is close to the prices of SGB that are traded in secondary market.
Investors will get 2.5 percent interest, payable half yearly. These bonds are listed on the stock exchanges. At the time of maturity, the RBI pays the prevailing value of gold. “SGB works the best for long-term investors, as they get interest and capital gains are tax-free if held till maturity,” says Ravindra Deshmukh, Certified Financial Planner, Arthmitra Financial Services.
SGB has a tenure of eight years and has an exit option for investors after five years, on each interest payment date. The other ways to buy digital gold are through a gold exchange traded fund (ETF) and gold fund of funds. But those investments charge expenses – around half a percent each year.
SGBs have no costs associated with them. For long-term investors, SGBs are more attractive than gold mutual funds. If you hold the SGB till maturity, then all the profits are exempt from capital gains tax. Interest earned is added to your income and taxed as per your slab rate.
What does not work?
These bonds are not very liquid. Bonds in many series either do not trade or trade at a discount to the spot prices on the stock exchanges. The average volumes traded on the stock exchanges are rising gradually. Due to the high demand in the recent past, in some cases, the SGBs are trading at a slight premium to the spot prices of gold issued by the IBJA – Indian Bullion Jewellers Association.
Should you invest?
Gold is a hedge against inflation over the long term. RBI has upped its inflation estimate to 5.7 percent for FY22. Earlier, it was estimated at 5.1 percent. “As we are entering into a high inflationary period, long-term investors should have an allocation to gold through SGBs,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors. In addition to the interest received, investors could earn at least 2.5 percentage points more returns than the rate of inflation, he adds. If inflation remains sticky for long period of time, then the negative real yields on bonds may last longer. This, in turn, will drive investment demand for gold.
Like equities, gold, too, offer lumpy returns. In the last one year ended, gold prices have corrected 14.7 percent. However, the first half of CY2020 was rewarding for investors, as gold gained 23.8 percent.
In the recent past the prices of gold have fallen as the US Federal Reserve has talked about tightening of monetary policy. Though there is no timeline mentioned for the same by the US Fed, markets are anticipating tapering to begin in the first quarter of CY2022. In simple words, till date, the US Fed used to buy back bonds from the market and helping out the economy by pumping easy money. But if the Fed chooses to reverse the process- to stop buying bonds from the market, and instead start selling them, the prices of bonds will fall and yields would rise. A rise in US bond yields would also lead to investors selling gold and investing in US bonds on the back of rising yields.
That’s easier said than done, for now. The economies are yet not out of woods, globally. European Central Bank has become more accommodative and Reserve Bank of Australia decided to delay tapering. If US Fed also decides to further extend accommodative stance to fight impact of delta variant, then the gold prices may see some support. “Protecting and reviving their economies is still central banks’ priority. This continued monetary support will prove to be conducive for gold,” wrote Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum Mutual Fund in his recent note.
Equity markets are quoting at steep valuations worldwide and geo-political risks coming to the fore, gold is expected to see revival in investment demand. “Gold will continue as investors’ safe haven and central banks around the world could once again improve their buying appetite for gold reserves,” says Sunandh Subramaniam, Senior Fundamental Research Analyst, Choice Broking. This should push up gold prices to Rs 60,000 per 10 gram in the next one year, he adds.
SGBs are cost-efficient and can be bought in small tranches round the year to avoid timing risk. This particular issue closes on August 13, 2021 and bonds will be issued on August 17, 2021.