Gold Prices May Rise Further: 5 Reasons To Invest In Sovereign Gold Bonds

Sovereign gold bonds or SGBs as we call them backed by the government of India is an instrument to invest in gold. And it was introduced in the year 2015 by the Modi led government to channelize a part of household savings which otherwise was drawn to physical gold into this investment form of gold. Currently the IV tranche of SGBs is open from July 6 and until July 10, 2020, with issuance date being fixed at July 14, 2020.

So, if you have understood the basics of the instrument which are listed below:

1. RBI issued bonds: These bonds are issued by the RBI on behalf of the government

2. Maturity term:

They are a longer term instrument with a maturity of 8 years. Upon completion of which the redemption based on the market price of gold then is made in cash. Investors looking at making an early exit can do so after the fifth year of subscription but only on the interest payment dates.

3. Denomination:

The issuance is made in denomination of a gram of gold and in multiples thereof.

4. Dual advantage of capital appreciation and interest payment:

Gold in usual sense is a non-interest yielding asset but here we on the face value are offered 2.5% payable semi-annually all through the term of the instrument i.e. 8 years. Also, the last interest payment will be paid along with the principal payment on maturity of the instrument.

So, if your investment horizon is longer say 5-10 years and you at the same time wish to reap the benefits of holding gold in SGB form instead of the usual physical form.Here we list:

Why SGBs Score Over Other Gold Investments In Long Term?

1. Value Of gold is maintained over the tenure:

If you have a longer term horizon of say 5-10 years then holding gold in SGB form shall be the best and in fact may outdo other forms of investment in gold such as Gold ETFs, fund of funds or e-gold.

By saying this we mean that at the time of redemption, investor will be given the principal amount on the basis of the prevailing market condition or price then. So, as all asset classes have a tendency to go higher in price over time. Here also your value in gold shall be protected.

 

2. Interest component not with any other gold investment form:

Here as an incentive to hold gold in SGBs, an interest rate of 2.5% per annum is payable semi-annually which is a good source of income on a periodic basis. This is otherwise not the case in other gold instrument being a non-interest yielding instrument.

3. Sovereign guarantee:

Another feather in the cap of SGB is that the instrument offers sovereign guarantee so no chance of default. This backing is not available in case of ETFs for that matter.

4. No additional cost such as making or storage cost:

In the case of SGBs there is no threat of losing the instrument or storage cost and even for that matter any concern around purity of gold.
Also, when you buy gold beforehand say much before its actual consumption in physical form then you can face preference issue on design aspects etc.

5. Experts Foresee Further Steam In Gold In A Short To Medium Term

There is high volatility in the equities which is also lending support to the metal and there is expected a further upside in the short to medium term. As it is we have been vigilant to gold making new highs every other day in the domestic market. On Wednesday (July 8, 2020), gold hit a new high of Rs. 49348 per 10 gm during the session. Similar was the momentum seen in Mumbai's bullion market where also gold peaked to new high on global rates.

Mallya of Angel Broking is of the view that with the global output set to contract and the economies in a deep recession, gold as an asset class is a safe bet.
"Although, the physical demand has declined drastically due to the restrictions and lockdowns, the activity of global central banks and their net purchases of gold signal that uncertainty will continue for most of 2020.

We see gold prices in the international markets to move higher towards $1,900 by the end of 2020, while MCX gold prices might move higher towards Rs 51,000 per 10 grams mark in the same time frame," Mallya said.

"Because of uncertainties surrounding economic growth, gold prices are likely to fund support at higher levels. While in all standard asset allocation models, a 5 percent allocation to gold as an asset class is suggested with the intention of providing stability to the portfolio and as a hedge against inflation, a higher allocation may be contemplated based on portfolio size and other portfolio peculiarities," added Thomas of Emkay.

What You Should Note When Investing In Sovereign Gold Bonds?

But what needs your attention while investing in gold SGBs that current continuous rally in gold prices shall not be for a long term. And current rally is being majorly driven by coronavirus conundrum and its consequent global banks stimulus measure which is providing support to gold prices and as and when it abates there can be provided a clear sense on gold price direction.

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