As gold prices have dropped 5% from the all-time high levels in May, individuals can invest in Sovereign Gold Bonds (SGBs), the first series for this financial year announced by the Reserve Bank of India. The price has been fixed at Rs 5,926 per gram, and those investors applying and paying using digital modes will get a discount of Rs 50 per gram. The issue is open for subscription till June 23.
Investors will get interest on SGBs at 2.5% payable half yearly. Investment in these bonds eliminates storage costs and is easier to sell than physical gold. In fact, SGB has posted double-digit gains since its inception in 2015 and the investment has helped the RBI raise over Rs 30,000 crore since its inception.
Experts say as the outlook on gold prices remains positive, the minor correction is a good entry opportunity for long-term allocation to the metal. The recent moves by the US Fed capped gains for gold, leading to softness in the prices. A decline in interest rates has a positive correlation with gold prices as it reduces the opportunity cost of holding the metal.
Nish Bhatt, founder & CEO, Millwood Kane International, says gold prices will be guided by the action of the central banks, a possible chance of a recession in the US, and the geopolitical situation between Russia-Ukraine. “Expectations of global central banks easing rates from calendar year 2024 onwards will provide support to the yellow metal.”
Gold gains
Gold prices have gained 18% in FY23 and around 8% year-to-date. A note by ICICI Securities says gold prices have significant upsides towards Rs 68,000 levels over two to three years. “Over the past five decades, larger uptrends in international gold prices have lasted usually for four to five years. In the current context, we are in the middle of the current uptrend. We expect markets to maintain the rhythm and continue the uptrend for another couple of years,” the note says and adds investors should continue investing to benefit from multi-year uptrend.
It also points out that investment in gold should always be considered from an asset allocation perspective as long periods of sub-optimal returns and returns in a non-linear pattern are an inherent feature of gold price movement.
SGBs are superior alternative
Investing in physical gold has limitations as securing the metal is an expensive affair. Investors do not earn any regular returns and get only capital gains at the time of selling if the prices rise. So, investing in SGBs can help diversify the portfolio and also gain from the tax benefits.
An investor can buy SGBs digitally through the websites of scheduled commercial banks, bank branches, designated post offices, National Stock Exchange and Bombay Stock Exchange. The minimum investment is one gram and the annual limit is four kilograms for a Hindu Undivided Family. An individual can pledge the bonds to get a loan up to 75% of its market value.
Investors have to hold the bonds for eight years and will have an exit option from the fifth year which can be exercised on the interest payment days. Capital gains at the time of redemption after eight years is exempt from tax. Ideally, investors should hold these bonds till maturity and for a shorter duration look at gold exchange traded funds (ETFs). This year’s Union Budget has made investment in SGBs more attractive than other forms of investing in the metal such as gold ETFs and digital gold.