Should You Buy Sovereign Gold Bonds?

The fifth tranche of sovereign gold bonds (SGB) scheme 2021-22 has opened for subscription on Monday, with the issue price set at Rs 4,790 per gm of gold. For investors applying online and paying through digital mode, a discount of Rs 50 per gm (at Rs 4,740 per gm) is applicable.

Gold prices have seen some correction and analysts say the drop below Rs 46,500 per 10 gm (Rs 4,650 per gm) can lead to more weakness in the short term. But investors looking to buy SGBs for the long term should not get concerned about it, they said.

Last year, the government had announced SGBs in six tranches from May to September 2021. The fourth tranche of SGB 2021-22, which was sold from July 12 to 16, was offered at Rs 4,807 per 10 gm. The May tranche was sold at Rs 4,889 per gm.

RBI will issue these bonds in its fifth tranche on behalf of the government. The issue will close on August 13, 2021.

Nish Bhatt, founder and CEO of Millwood Kane International, said, “Investment in non-physical gold, via digital or paper gold, is highly recommended as it provides high liquidity, no storage cost, and is easier to sell vs physical gold.”

Investment in SGBs comes with an interest coupon payable semi-annually, and is a superior alternative to physical gold. The investments in non-physical gold will also help the government to keep a check on the currency and larger fiscal deficit, he said.

Gold prices have softened in the past few weeks to touch a one-month low. In the past one week alone, it has dropped nearly Rs 1,000/10gm in value. The bullion market witnessed a slight selloff with gold and silver tumbling more than 4 per cent in Friday’s trade, after a positive US jobs report, and expectation that the US federal monetary stimulus will be rolled back.

The rising dollar and treasury yields on the back of a sooner-than-expected policy tightening by the Fed, have largely led to softening of gold prices, which have traded in a narrow range, domestically and internationally, during the past few months.

Going forward, the latest variant of the virus, pace of vaccination, unlocking, and signs of policy tightening by the Fed will guide gold prices.

Shalini Warrier, executive director at Federal Bank, said, “SGB is a low-risk, long-term investment with assured returns, and is well suited for investors across all age groups. Indians have always had an affinity for gold. With SGBs, an investor gets the benefit of returns from gold without the hassle of buying and storing physical gold.”

How do SGBs work?

Investors can subscribe to SGBs during primary issuance by paying the announced price of gold for the fifth tranche. Upon allotment, these bonds will be held in the demat account.

For this tranche, investors would receive fixed interest of 2.50 per cent per annum on investment value. On maturity, they would receive redemption proceeds at the prevailing gold price. Thus, SGBs offer gold-linked returns to investors.

The tenure of the bond is eight years. But since each tranche of SGBs is listed on stock exchanges, investors can liquidate their holdings before maturity if they wish to. If they continue to hold it till maturity, capital gains arising from redemption, is tax-exempt.

Also read how to invest in sovereign gold bonds