Commodity Analysis

Should you invest in sovereign gold bond?

Rajalakshmi Nirmal | Updated on March 09, 2018 Published on April 23, 2017

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Sovereign gold bonds are the most attractive route to invest in gold

Not very long ago, global investors were selling their gold. Between July and December 2016, gold prices plummeted 18 per cent to hit a low of $1,128.5/ounce. But, in three months, the metal is up again close to $1,300/ounce.

With days to go for Akshaya Tritiya, should you bet on the yellow metal and invest in the upcoming sovereign bond issue? Here is an analysis.

Sovereign gold

The first series of the sovereign gold bond issue for the current fiscal 2017-18 is open for subscription during April 24-28. The issue price is fixed at ₹2,901 per gram — at a ₹50 discount on last week’s average price of ₹2,951. The bonds will be issued on May 12.

Given that the short-term outlook for gold looks promising, investors can hope to make tidy gains on the interim rally as well.

Investors who are looking for investing in gold can go for sovereign gold bonds. These bonds are issued by the Government of India and offer returns linked to gold price. Investors will also get a coupon of 2.5 per cent per annum. The capital gains you make by investing in these bonds is tax exempt, provided you hold them till the end of the tenure of eight years. Redemption, though, is allowed from the fifth year. But this will result in capital gains tax of 20 per cent (with indexation benefit).

Interest on these bonds — a promised 2.5 per cent rate — will be paid semi-annually. But two things need to be noted. One, the interest will be calculated on the face value of the bond, and not on the market price. Two, the interest payments are taxable at the individual’s slab rate.

Sovereign gold bonds are the most attractive route to invest in gold currently.

The other paper form of gold — Gold ETFs — has the disadvantage of higher costs. You will have to pay all routine charges of a mutual fund. Investing in gold in the physical market as coins or jewellery is also not recommended. There is no guarantee on purity unless it is hallmarked, and you shell out making and wastage charges. Also, after purchase, safekeeping of the gold could be a daunting task.

Further, when you buy gold in the physical form, on the capital gains you make, you will have to pay at the slab rate.

Process

The investment process is simple. All you have to do is reach out to your bank or stock broker or the post office. The minimum investment starts from 1 gram (1 unit) with a maximum of 500 gram (500 units) for each individual in a year.

There is no risk of proportional allotment. You will get all the units you apply for.

If you go through your stock broker, he can buy it for you online. Or, if you have an online account with a stock broker, you can do it yourself. The units, on issue, will be credited to your demat account and money debited from your trading account.

But, if you are buying through post office, you will get only a bond certificate. Later, if you want to sell it in the secondary market, you will first be required to convert it to demat form.

When buying through banks, you will be required to fill up a form where you can give your demat account number if you have one. Otherwise, you will be issued only a physical certificate.

Gold outlook

Every time panic grips the global financial market — on political turmoil or other reasons — the yellow metal rallies as investors see a better risk-reward trade off in gold. This is what is happening now. The geopolitical tensions between North Korea and the US as also the latter’s military strike in Syria are bringing back the lustre to gold.

With the first round of the contentious French elections over, investors will be eyeing the outcome of the final round in May which will be followed by the people’s referendum to stay or leave the EU. Also, with the UK Prime Minister Theresa May calling for an early election (on June 8) seeking a strong Brexit mandate, risky investments may only sour.

In the US too, the recent set of economic data does not present a convincing picture for the next rate hike any time soon. Recently, Trump called for a weaker dollar and said he preferred low-interest rates, doing a U-turn on his pre-election speech — when he criticised Janet Yellen for a dovish stance on rates.

This week, markets will also eye Trump’s promised tax reforms. If the reforms are going to suck out tax revenue for the US Treasury, the increase in deficit will pull down the greenback — a positive for gold.

The short term — next three-to-six months — looks good for gold. But again, as the US has embarked on an uphill journey on rates, there may be ups and downs. Long-term investors, though, should not bother about volatility in the short term.

They can buy gold, about 5-10 per cent of their overall portfolio, to diversify risk.

For Indian gold investors, returns depend on the movement of rupee vis-à-vis the US dollar. With good inflows into the equity market, the rupee is holding up strongly against the dollar now. If rupee strengthens further against the dollar in the next few months, there is a risk that returns on gold may be muted despite stronger prices in the international market.

Published on April 23, 2017
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