On Monday, Sovereign gold bond or SGB 2020-21 tranche opened for subscription and for it the prices have been fixed at Rs. 5104 per 10 gm. Additionally those investing through the online payment method will be able to get it at a discount of Rs. 50 per gm.
Bullish momentum in equities also putting pressure on gold
Now given the current pace at which gold prices have corrected i.e. by as much as 10% since August highs and the record strength seen in Indian equities for the past 10 straight session, some more weakness can be expected in the yellow precious metal before it begins to gain again on other favourable factors such as weakness in dollar and the like.
On Monday i.e. January 11, 2021 gold after declining by over Rs. 2300 per 10 gm in two days regained some momentum and still settled at Rs. 49300 per 10 gm, considering this price on the exchange, the SGB is available for a higher price. If we compare gold and Indian equities, they are currently quoting in the ratio of 1:1 and as the momentum in the Indian equities shall prolong, we may some pressure on gold.
Covid 19 vaccine progress can still impart some correction in gold pricing going ahead
Another factor that can impact gold pricing in the near term is the progress on the Covid 19 front, India itself shall commence Covid 19 vaccine roll out from January 16 and this strengthens prospect of an early recovery from the economic fall-out due to the pandemic.
Other global concerns that will surely have a bearing on gold prices are smooth transition of US President elect Joe Biden and the dole out of the US aid for the pandemic.
Also, what shall be watched out for and will determine gold's likely direction shall be the pace of economic recovery, though contraction for the last quarter was lesser than anticipated as well as glut of liquidity being injected by global central banks.
What should investors note when considering investment in gold?
Note gold from time immemorial has been considered a store of value, though in due time some other investments such as bitcoin as in the present case have tried to outshine it, gold has the capacity to serve as a portfolio diversifier as well as can give inflation beating returns, so one definitely needs to have gold in his or her investment portfolio. And if not for the purpose of use, investment in gold should ideally be made in SGBs, gold mutual fund and other digital forms of gold to do away with the hassle of theft, storage cost etc.
Now as gold is said to rule the year 2021 also but not possibly at a scale as seen in 2020 when it delivered over 20% return, investors should wait for more correction in gold pricing before putting in their bet on gold.
Further as was and is seen during the pandemic, investors need to be mindful of the fact that the safe haven gold should not be opted only during risk-off sentiment and high uncertainty. And infact by its intrinsic nature provides investors with capital appreciation, low correlation to other asset classes and can offer risk-adjusted return with high liquidity similar to other financial instruments.
So, given the benefits of SGBs such as 2.5% interest payable semi-annually as well as tax exemption on capital gains if held until maturity, you can consider investment in small amounts.