Sovereign Gold Bonds: Should You Invest?

Reserve Bank of India (RBI) has gained a record amount of borrowing from its Sovereign Gold Bond (SGB) Scheme. It is a gold bond issued by the RBI, on behalf of the union government. The Finance Ministry has disclosed a data informing - the RBI has raised Rs. 16,049 crore during FY21 from SGBs, while the central bank has obtained more than Rs. 25,702 crore in total since the scheme's beginning in November 2015. RBI had opened subscriptions of the SGB scheme 12 times during the aforesaid fiscal. Till now in FY 22, the bank has finished five tranches and gathered more than Rs. 6,000 crore so far. In 2020, SGB was the top gainer for RBI, since 2015.

SGBs are government gold securities that are designated in grams of 24 carat gold. The bonds are redeemed in cash and paid back to the investors on the maturity of the SGB, that is after 8 years. The RBI has now opened the sixth tranche of SGB and people are again showing storing interest in it. The subscription price for this tranche of SGB has been fixed at Rs. 4,732/gm, with a discount of Rs. 50 for online applicants.

First, the price of gold is on the rise again after a brief spell of weakness and the outlook is positive. Uncertainties, typical of capital markets, and the fear of a global liquidity glut coming to an end are giving investors enough reasons to look at gold. But above all, gold is winning in its most basic form - as a hedge against inflation.

Why did SGB become popular?

Since its inception, SGB could acquire attention from investors because of its unique offerings of annual (payable half-yearly) interest of 2.5% and RBI's storage security. The digital payment routes and additional discounts even attracted the wealthy even more. Since the last year, the gold business in India is watching both massive inflow and outflow of liquidity by selling and buying gold. On one hand, distressed citizens took up gold loans largely because of immediate liquidity, and on the other hand, RBI gained a record amount of borrowing from the SGB scheme. From one side distressed citizens used it for cash and the wealthy population with a flush of savings, invested even more in SGB than before. Compared to traditional gold ETFs and physical gold (jewelleries/coins), SGBs were top gainers. Also, due to the lockdown, interested gold buyers too could not reach stores; the gold bond scheme was an attraction for them.

The onset of the Covid-19 pandemic helped the gold prices to emerge in the international market, thus reflecting the same trend in India. Fear of the equity market, global liquidity glut, and falling US dollar index created a positive outlook for gold back then. Now, the global economy is gaining momentum, but the fear of inflation is still holding the gold prices steady proving its stability as a hedge. Due to the aforesaid reasons, wise investors have always chosen the paper gold over its physical counterpart, which had emerged enormously in the last 1.5 years considerably. Hence, the ongoing sixth tranche is a great opportunity for investors to pick up the scheme and secure the money for the long term.