Do Sovereign Gold Bonds Yield Higher Returns Than Physical Gold: Check Out The Veiled Truth Here

The first 8-year Sovereign Gold Bonds (SGB) by the Reserve Bank of India (RBI) in November 2015 were initiated to deliver one of the most convenient and easiest methods for investors looking for robust gold returns. The prices of these bonds are directly linked with the market value of the yellow metal, which would have a fluctuating effect, the same as the physical gold.

The bonds are denominated in one gram of gold with a minimum investment to be the price of 1 gram and a maximum of 4 kg per person during a particular financial year. The maturity of these bonds is for 8 years, however, as per the RBI guidelines, redemption is allowed after completion of 5 years from the date of issue on the interest payment dates. The amount is redeemed in the bank account of the investor that applied directly to the RBI, while those retail investors who bought the SGB from the exchange through a broker would receive the redeemed amount in their trading accounts after the bond's maturity.

These bonds have RBI backing the investments, which grabbed much attention from investors, eyeing the potential of ever-increasing gold prices. The issue price for the first SGB 2015-I series was Rs. 2,684/- per gram or bond, with a 2.75% premium paid every six months.

The interest paid is apart from the increase in gold prices, which would mirrored by the SGB as well. As per the issue price, the interest gained every six months was Rs. 36.90/-, accumulating to around Rs. 590.48/- by the end of the eight years per gram of gold. The redemption price of these bonds on the final date was Rs. 6,132/- per gram, a net increase of 128.46% from the date of issue. By adjoining the interest premium of 2.75% above the increased prices, a gross return of almost 150.46% was gained by the early investors of the 2015-I series yesterday.

Likewise, on 1st December 2015, physical gold cost around Rs. 2,509/- per gram. The price on the end of the day of 1st December 2023, for the yellow metal was recorded as Rs. 6,295/- per gram, delivering almost a return of Rs. 3,786/- or 150% if the gold medal was purchased and sold the same day of SGB issue date and redemption date respectively.

As per the Goodreturns website database, a gram of yellow metal was at Rs. 5,448/- for 24-carat pure gold on 5th December 2022. Today the prices have breached all-time high levels and currently stands firm at Rs. 6,278/- per gram. This exclaims that physical gold delivered about 15.23% returns on investment in the last 12 months. Similarly, backed by the market rates of gold metal, SGB Series III issued in December 2022 was at Rs. 5,409/- on the issue date and the last traded price for the same is recorded as Rs. 6,225/-. Adding the 2.5% premium paid twice yearly, the SGB expiring in December 2030 has delivered accumulated returns of almost 17.58% or Rs. 951/- per gram in the last 52 weeks.

Similarly, the SGB series offered on 7th December 2021, with a maturity date of 7th December 2029, had an issue price of Rs. 4,791/- per gram and on 5th December 2023, the bond is trading in exchange at around Rs. 6,179/- as per ICICI direct website, which means after adding the premium interest of 2.5% paid twice in a year, there has been 33.93% return on the investment made two years ago. On the other hand, the cost of physical gold on 7th December 2021 was around Rs. 5,117/-, and as per the goodreturns website, the average pure gold metal prices in India have touched the highest point ever to stabilise at Rs. 6,278/- per gram as of today on 7th December. The total returns delivered by physical yellow metal in the last two years are approximately Rs. 1,161/- or 22.53% per gram.

Hence, it becomes clear with the above description that almost parallel returns are delivered by both physical and virtual gold, despite the premium interest of 2.5% guaranteed by the RBI. When the bond invested is for shorter terms, there are fewer chances of higher returns, and deferring to this, when SGBs are invested for longer terms, especially after premature redemption begins, they offer marginally better returns than physical gold.

Moreover, the possibility of damaging the gold metal or the unfortunate incidences of theft lurks around gravely when it comes to holding the yellow metal. In contrast, the SGBs are better investment options as they offer 2.5% interest payment on the issue price every year and are tax-efficient. There are no labour charges involved while purchasing, no threat of losing the bond as it is virtually present in the trading accounts, no hassle while selling on the exchange, and without stepping out, no efforts are needed when final redemption of these bonds begins.