The 5th tranche of the government’s Sovereign Gold Bonds (SGBs) will open for subscription on Thursday, barely five weeks after the closure of the previous tranche on July 22.
The terms of the issue of the 5th tranche are identical to the previous offer, and there is not much to choose between the issue price. For the 5th tranche, the issue price has been set at Rs 3,150 per gram of gold against Rs 3,119 per gram for the 4th tranche.
So what could be the reasons for the government to come up with another issue so soon and should you invest in this series if you have investable cash and have not breached the 500 gram cap for an individual for the fiscal?
Gold price has been on an upward curve throughout the 2016 rewarding investors handsomely and the forecast for the yellow metal has been positive for the coming months. Demand for gold is likely to pick up in the coming few months with the festival season kicking in, to be followed by the marriage season towards the end of the year.
At the turn of 2016, domestic gold price stood at around Rs 25,070 per 10 gram, while it closed at Rs 31,255 per 10 grams on August 30, registering a 25 per cent gain.
Thus, with prices moving up and investors likely to be attracted towards gold, the Soverign Gold Bonds are a good option to lock in funds, either as investment or for gifting during the coming festivals and marriages. Other than capital appreciation, SGB also carries an interest rate of 2.75 per cent per annum.
However, investors should remember that the bonds would be long-term investment with the tenor set for 8 years with exit option from 5th year to be exercised on the interest payment dates. The redemption price will be based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA.
In the long term too, gold is expected to remain a good investment as uncertainties are likely to plague the global economy and domestic penchant for gold buying remaining intact. The true impact of Brexit is likely to be felt in the coming months and years, keeping gold prices firm as investors continue to look at the yellow metal as a safe-haven investment.
The government would have also been emboldened by the strong response it got to the 4th tranche of the Sovereign Gold Bond, which saw a collection of Rs.919 crore, the highest since the SGB series was launched last year. This was equivalent to buying of 2.95 tonnes of gold. The total amount raised in the four tranches so far was around Rs 2,240 crore.
SGBs have the added advantage of government guarantee and carry zero risk. The bonds are superior to physical gold in so far a there is not risk of theft. These are also exempt from capital gains, though the interest received would be taxable. Also you can use these bonds as collateral to avail loans from banks.
The only downside risk is that of capital loss in case gold prices head southwards and end up below the present issue price at the time of redemption. But given the market trends, the chances of this happening appears to be low.