Why investors should invest in sovereign gold bond | Business Standard

Why investors should invest in sovereign gold bond

Tinesh Bhasin | Mumbai Sep 08, 2016 02:45 PM IST
Investors who invested in the first tranche of the sovereign gold bond (SGB) issue are sitting on a return of around 18% if one looks at the bond’s trading price on the National Stock Exchange. The bonds that were issued for Rs 2,684 in November are now trading at Rs 3,180. Add to this the 2.75% interest rate that the government pays annually, and the first year returns are around 21%.

The government has now come up with the fifth tranche of SGB that will close on September 9. The Reserve Bank of India has fixed Rs 3,150 per 1 gm of gold. This is the highest rate since the first tranche. Going by the past returns and the recent rally in the gold price, does it make sense for investors to enter gold at the current price?


Recent data from the World Gold Council for the first half of 2016 show the upsurge in demand for gold was driven primarily by investment demand from investors in the developed world — US, Europe and Japan. The investment demand of 1,063.9 tonnes during the first half of 2016 was 16% more than the previous high in the first half of 2009 (after the financial crisis).

Experts say that due to ongoing uncertainties in the developed economies, the demand for gold has remained strong. Many believe that real interest rates in the developed world will remain negative for some more time and that’s why they are flocking to gold. And many believe that the rally will continue. 

The US Fed had indicated earlier that it would increase interest rates. But the poor job data that came out recently dims chances of a rate hike in the near future. Experts believe that despite the recent rally, the gold price may not have peaked yet. In the last gold rally, the international gold prices went beyond $1,900 per ounce. The current price hovering around $1,350 level is way below the peak. There’s still room for prices to go up further.

Experts say that investors who don’t have exposure to gold can look at the current tranche of SGB for 5-15% exposure to the metal helps to hedge the portfolio. Along with the price appreciation, the investor will also get an annual interest of 2.75% on the investment. Investing through SGB also makes sense as the government has given exemption from capital gains tax when the investor redeems his investment. If the bonds are sold on exchange after holding for over three years, the investor can get indexation benefit.

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The minimum investment is 1 gm and the maximum is 500 gms. While the tenure of the bond is for a minimum of eight years, there are options to exit in the fifth, sixth and seventh year.


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