Sovereign Gold Bond issue price breaches Rs 5k/gm mark: Is it worth investing in SGB now?

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Updated: Aug 04, 2020 3:48 PM

SGB doesn't have any credit risk, but with the tenure of 8 years, with exit option from the 5th year on interest payment dates, it does have capital risk.

Gold, Sovereign Gold Bond, SGB, Sovereign Gold Bond Series V of 2020-21, gold prices, return on gold, gold price movement, credit risk, capital riskWith a discount of Rs 50 per gram, online subscribers will get the Bonds at Rs 5,284 per gram or Rs 52,840 per 10 gram.

The Sovereign Gold Bond (SGB) Series V of 2020-21 opened for subscription on Monday, August 3, 2020, at an issue price of Rs 5,334 per gram or Rs 53,340 per 10 gram, while Gold October futures were trading at Rs 53,577 per 10 gram on the day. The issue will close for subscription on August 7, 2020 and the issuance of the Bonds will be made on August 11, 2020.

A discount of Rs 50 per gram will be given to those who make payment online. So, the online subscribers will get the Bonds at Rs 5,284 per gram or Rs 52,840 per 10 gram.

As the yellow metal is notoriously volatile, investors are in a dilemma whether to invest in the SGB at this high price, because the underlying asset class of the Bond is Gold.

As far as the return is concerned, aided by rupee depreciation and strong domestic demand, Gold has delivered 8.8 per cent CAGR since 1970s, even as the yellow metal has compounded at mere 3.3 per cent in USD terms in the same period.

Gold, Gold prices, Sovereign Gold Bond, SGBGold prices per gram in USD and INR from January 1, 1970 to August 3, 2020.

In the international market, Gold witnessed a long consolidation period of 20 years between 1984 and 2005 (hovering between $250-$500 per ounce) after witnessing a 8.5 times surge in prices from $100 per ounce to $850 per ounce between 1976 and 1980.

After 2005 the yellow metal witnessed another spectacular surge of 7.5 times to hit a high of $1900 per ounce in 2011 before hitting a volatile phase and declining below the $1200 level by 2016. It again started surging after a 2-year consolidation period between 2016 and 2018, and has registered a 40 per cent rise since 2019.

So, volatility is definitely a matter of concern with Gold hitting the all-time hing level in the international markets, surpassing the previous high it witnessed in 2011.

However, with a gloomy economic outlook on account of the Covid-19 pandemic, Gold may see a safe haven demand till the world economies recover from the virus attack.

Moreover, the massive selloff by many big investors – like ex-Infosys CEO Shibulal and HDFC Bank CEO Aditya Puri selling shares worth Rs 800 crore each in their respective companies, Jack Ma of Alibaba selling shares worth over $9 billion, Mukesh Ambani selling one third of shares in JIO – have left investors baffled and scrambling to take refuge in Gold.

With the government backing, SGB doesn’t have any credit risk, but with the tenure of 8 years, with exit option from the 5th year on interest payment dates, it does have capital risk. So, is it worth investing in SGB now?

“Gold should be an inevitable part of anyone’s portfolio,” says Ajay Sharma, Director & Designated Partner, Investment Mitra Advisors LLP.

“While in a normal course, Gold appreciates vis-a-vis inflation over the long term, but in the short term its price is driven by demand. During the current times of uncertainty and poor economic growth, demand for Gold will be high for some more time to come,” explains Sharma.

“Even at the current price, Sovereign Gold Bonds make good sense over fixed deposits as it is offering 2.5 per cent interest over and above the Gold price appreciation,” he says.

However, it’s better not to over invest in Gold/SGB, but invest as a hedge against market volatility.

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