Gold & Silver

Should you invest in gold bonds?

Rajalakshmi Nirmal | Updated on September 10, 2019

Is this the right time to investing in gold? (File photo)   -  Bloomberg

BL Research Bureau

A new issue of sovereign gold bonds is open. With the spectacular rally in the yellow metal over the last one month, you may be keen to invest in this issue of gold bonds. So, should you go ahead? Is this the right time and right instrument for investing in the metal?

Before we jump into analysis, here are some details about the new issue — the Sovereign Gold Bond Scheme 2019-20 Series IV will be open till Friday — 13th September. The Reserve Bank of India (RBI) has fixed the price at ₹3,890 per gram. There will be a discount of ₹50 per gram for investors who are buying the bonds online. The minimum investment in these bonds is one gram. The coupon rate is the same as that of the previous issues’ — 2.5 per cent per annum on face value. This will be last issue for 2019-20.

The question of timing

Gold is a classic safe-haven asset. It performs only in times when investment in other asset classes, including equity, gets risky.

That said, now there is a perfect storm to support gold: on one side, with the US-China trade tiff is pulling global trade to a standstill, and the other side the dollar is strengthening, and emerging market currencies are collapsing and large economies, including China, are seeing a demand slowdown.

Given that the problems of the global economy is not going to end any time soon, it is a good time to invest in gold.

Also read: Buy gold at any level, says Mark Mobius

If Jerome Powell, the Federal Reserve Chairman comes under pressure and starts cutting rates soon, the yellow metal will get more sheen.

But note that at about $1500/ounce now, gold is already up about 16 per cent since January. So, you can’t expect strong returns from here, at least for 2019. A suggestion here: you should look at gold only a diversifier in the portfolio, and put only 10-15 per cent money in the metal — in which case, timing the entry is not critical. And, if you are someone who is saving in gold for your child’s future requirements, then again do not take stress to time your purchase, buy a few grams of gold every time a new issue of the gold bond opens or do a SIP in gold ETFs listed in bourses.

Gold investment: in which form?

Sovereign gold bonds are the most attractive route to investing in gold for any Indian investor as one gets to enjoy a coupon rate on the face value of the bond (price of a gram of gold on the issue date). Thus, irrespective of how the gold prices move in the tenure of investment (8 years), every year, the investor will get a fixed amount of interest from the bond.

Further, the capital gains you make by investing in these bonds is tax exempt, provided, you hold them till maturity. Premature exit is allowed from the fifth year, but, you will then have to pay for capital gains tax of 20 per cent (with indexation benefit).

However, if you invest in other forms of gold, say Gold ETFs or gold fund-of-funds, you don’t get the benefits mentioned above on taxation or interest.

Also read: It’s time to add gold ETFs to your portfolio

Also, in gold ETFs or gold fund-of-funds, the cost of investment will be higher as you will have to cough up for all routine charges of a mutual fund.

Investing in the yellow metal in the physical form as coins or jewellery is not recommended. One, there is no guarantee on purity, as even today many jewellers in the unorganised market sell gold that is not hallmarked, and you also shell out additionally on making charges. Secondly, at the time of re-sale, when you want to encash on the rally in gold price, you again lose value as the jeweller will deduct wastage charges.

Published on September 10, 2019

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