The Reserve Bank of India has come out with yet another tranche of sovereign gold bonds (SGBs) that are open for subscription now. From the first set of bonds issued in 2015, there are now several series of such SGBs available. The current tranche is being issued at ₹5,197 per gram, as set by the India Bullion and Jewellers Association (IBJA) based on the average of the previous three business days’ closing prices. The SGBs are open for purchase today and would be available till August 26.

Those applying and making payments via online mode will get an additional ₹50 per gram discount taking the effective price to ₹5,147. The gold prices have rallied about 9 per cent over the past year (in rupee terms).

In this financial year, this is the second tranche after June 2022. Amidst a volatile equity market, unpredictable macroeconomic situation, rising inflation in developed economies and geopolitical tension, gold is considered a best bet to hedge their overall portfolios. More so, as the US and many countries in Europe seem to be on the brink of a recession.

The SGBs are generally considered the best way to take exposure to the yellow metal.

Here’s what you must consider before you apply for these SGBs.

What could drive gold prices now

In the past five years, gold has delivered an annual return of around 11 per cent (in rupee terms), while the Sensex has given 14.8 per cent. In general, the prices of gold fluctuate based on host of factors. In particular, the key points cited for deciding the yellow metal’s price movements are as follows:

* The strength or weakness of the dollar. A weaker dollar generally result in stronger rallies of gold prices. But recently, despite the dollar gaining strength against major currencies, the price rally was subdued .

* The state of the equity and debt markets play an important role. Usually, gold rallies when equity markets are volatile or are on a falling spree. Indeed, 2008, 2011 and 2016 are the years when gold outpaced the Nifty.

* The geopolitical tensions, including Russia and Ukraine could result in investors rushing to the safe-haven assets.

* An elevated trend in the crude oil prices too had spiked prices of gold in the past. Given the crude’s rally over the past six months, gold could also gain

* Inflation has touched double-digit levels worldwide among developing and developed countries. The rise in interest rates in most countries would mean a likely subdued economic activity , with some (US and UK, for example) also set to face economic recession.

* Gold’s demand as an investment product would also drive the prices up.

How SGBs score over other options

SGBs score on several investment aspects. For one, there are no charges for investing in SGBs. The Gold ETFs charge anywhere from six to 1.14 per cent as investment and storage costs, whereas it is none for SGBs. The issue and redemption pricing are arrived at by the average set by the IBJA, and are transparent. The Gold ETFs can be redeemed for cash or gold resulting storage issues and added costs.

The investment into SGBs offer 2.5 per cent interest, payable semi-annually.

With eight-year lock-in period, the SGBs redemption proceeds are tax-free at the hands of investors. These bonds are traded on the BSE and NSE, albeit with thin volume, thereby creating liquidity issues. Exiting the bonds via the markets after three years would result in long-term capital gains of 20 per cent with indexation benefits. Selling before 36 months would result in the gains being added to your income and taxed.

Gold bonds in the secondary market

Though SGBs are traded on the stock exchanges, their liquidity is not great. For example, the SBGs maturing on October 23, 2025, currently quotes at ₹5,021 with just 10 bonds changing hands on the BSE today. The SGBs of November 2025 trade at a significant discount at ₹4,909. But you may not be able to buy as just eight bonds were traded, that too, on July 27.

Though prices of SGBs in the secondary markets are cheaper, buying them at a discount is challenging.

What should investors do?

In general, gold should account for not more than 5-10 per cent of your overall portfolio. If the recent rally had boosted your equity portfolio disproportionately on the asset allocation pattern, adding gold to brace up for volatility may make a sense. Given the uncertain times we face on macros, equity and debt market volatility as well as geopolitical tensions – China-US over Taiwan, Russia-Ukraine etc., investors with a modest risk appetite can invest in SGBs for a possible inflation-beating returns.

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