Sovereign Gold Bond 2022-23 Series I To Open: Should You Invest?

Every year since 2015, the government has been rolling out Sovereign gold bonds in tranches. Likewise, to encourage financial investments into gold for the Fy23, SGBs shall open on June 20, 2022.

Below are some generic details on SGB

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

The issue price for SGB has been fixed at Rs. 5,091 per 10 gm

Current factors weighing on gold

For now gold is largely being weighed down by the Fed's recent hawkish and its bets to go aggressive in upcoming meets to curb inflation which has scaled to a 40-year high. Notably in last week's Fed outcome, the interest rate has been hiked by 75 basis points, the highest in many decades. And when interest rates take an upward climb, safe haven gold loses its sheen as the cost of holding non-interest yielding bullion increases.

"Aggressive monetary tightening, rising yields and a stronger dollar are key drags for the gold prices. Rising inflation failed to impress the market, instead raising fears of a more hawkish stance by the central banks. That said, the spread between the fed funds rate and CPI is at its widest, suggesting the Fed is struggling to contain inflation," analysts at ANZ is being mentioned as saying in Capital.com.

But it remains "stuck in the middle of a tug of war between inflation and interest rates," Haberkorn-Senior market strategist Bob Haberkorn said in a Reuters report.

Outlook for gold in the near to medium term

History has been evidence to the fact that gold is capable of hedging any downside risk. Likewise, while the current bullish trend is not sure, factors like concerns around economic growth, high inflation and heightened geopolitical risk shall support gold. So, while the support for the bullion is seen at $1850 per oz, there is also seen potential upside of it scaling $1950/oz.

 

Should you invest in SGB 2022-23 Tranche I?

Given the issue price of Rs. 5091 per 10 gm, SGB tranche I is reasonably priced. As 24K gold in Mumbai is available for Rs. 52,110 per 10 gm and this is exclusive of GST and other levies. So, here the prime advantage that you may reap is the lower price plus an additional interest rate benefit of 2.5% per annum payable semi-annually on the nominal value.

The capital gains tax arising on redemption of SGB to an individual is exempted. The indexation benefits will be provided for long-term capital gains arising to any person on transfer of the SGB.

"The price for Series-I of the Sovereign Gold Bond 2022-23 is fixed at Rs 5,091/gm. Investment in Sovereign Gold Bonds has become an accepted practice, fast replacing physical gold. RBI has already raised in excess of Rs 16,000 crore in FY21, and over Rs 25,702 crore via SGBs since 2015.

Investment in non-physical gold, digital gold provides higher liquidity, eliminates storage costs, and is easier to sell than physical gold. Also, an investment in SGBs comes with an interest coupon payable semi-annually. After touching a high in the month of April, gold prices have cooled off due to the rally in the US Dollar. A higher US dollar makes it expensive to own gold. An expectation of a further rise in inflation, interest rates, and yields across the globe will restrict much of the gains for gold. Traditionally, gold prices tend to rise during uncertain times. The escalation in the geopolitical tensions in Russia-Ukraine, new variants of the virus may push gold prices upwards", views of Mr. Nish Bhatt, Founder & CEO, Millwood Kane International on 'Sovereign Gold Bond 2022-23 Series-I".