As we write both internationally ($1950 per ounce) and in the domestic context (Rs. 52000 per 10 gm on July 28, 2020), gold prices have now hit a new high and with uncertainty still lingering, prospects of gold are only brighter with some correction from time to time. And given this, you may be tempted to bet on the precious yellow metal to reap gains on your capital.
Here we are primarily focusing on the SGB scheme Series V that opens today and until August 7, 2020, with an issue price fixed at Rs. 5334 per gm. Interestingly, this form of gold investment is being advised for a number of benefits as against physical gold.
Why You Can Invest In SGB Series V?
Though the price for which the Sovereign Gold Bond Series V is being offered is less compared to current market rates, it is higher considering the issue price of the first tranche of Fy 2020-21 issued in April with a price of Rs. 4589 per gram.
And so the only factor motivating you to take a bet at the current juncture given the already run up prices can be the allocation theory i.e. to say that in case you have less allocation i.e. below 5% in your overall financial portfolio to gold you can subscribe to the issue for better return.
It is to be mentioned here that investors going forward in the short term may see price correction in gold, which has already run 51% in the last one year and 11% in July alone.
This is being said as SGBs give you some of the advantages such as no storage or security related cost issues, annual interest of 2.5%, tax free returns etc. This makes it an ideal bet for investors who wish to accumulate gold and hold it until maturity.
Also, if held until maturity SGBs do not attract any capital gains implication which is indeed a lucrative bet for HNIs.
Furthermore, other than the high liquidity benefit that comes with gold ETFs, SGBs fare better when compared on taxation as well as expense.
SGBs that though have a longer term of 8 years can be redeemed in the 5th year on the interest payment dates with redemption price being the simple average of price of last 3 days.
Why you should not invest in SGB Series V?
SGBs can also be bought from the secondary market as they are traded on the exchanges with low liquidity. There can be a case that you can get these bonds at a better pricing than the current high price, provided you have a trading and demat account. This is one reason.
Another is if you already have an allocation of 10-15% into gold, don't rush into buying these gold investments at such a high price as it can be way risky.
Analyst opine that before a long term surge in gold price there is a high chance of steep correction in gold price after the fresh rally. And if creating a SIP kind through every tranche that comes up you may rather be better off by skipping the current issue and seek for a better pricing in the next issue for the FY.
Outlook for gold price
Outlook for gold remains positive with most global investment houses upping their target price for gold to $3000 per ounce by the end of 2021 as by HSBC and BoFA.
"The US economy suffered its worst period ever in the second quarter, with GDP falling a historic 32.9%, jobless claims at a high and no signs of any relief from coronavirus. All this will continue to support gold prices," says Anuj Gupta, Deputy VP (Research), Angel Broking.
"A quick rebound in economic activity seems unlikely in the near future. This will cap gains in equities and keep the increased investment demand for gold intact," says Chirag Mehta, Fund Manager, Quantum Mutual Fund.
The price factor as well as your asset allocation in gold should be factored in currently while taking a bet on the subscription of SGBs that opens today. As else, SGBs are undoubtedly a must have in one's portfolio if one wants to hold them until maturity for accumulating gold as physical gold and other forms come with their own disadvantages.