Gold prices fall below sovereign gold bond issue price; should you invest?

With Dhanteras and Diwali just round the corner, gold buying that is considered auspicious in festivals is in everyone's mind. Now that there's awareness of paper gold, some people choose it over physical gold. In this backdrop, a new series of sovereign gold bonds (SGBs) has started. However, gold prices on Tuesday were trading below the issue price of latest SGB scheme. The issue price of the latest SGB scheme has been fixed at Rs 5,177 per gram with a Rs 50 per gram discount for online subscription.

The gold market prices fell after Pfizer Inc announced that its experimental COVID-19 vaccine was more than 90 per cent effective in preventing COVID-19 based on initial data from a large study. Gold prices rise when there is uncertainty in the economy and the stock market. It had hit a fresh high of Rs 56,200 in futures market in August before some correction. As the Pfizer update triggered global markets, including India, gold prices fell below Rs 50,000 per 10 gram. The stock market and gold have an inverse relation in the price movement.

So, now that latest SGB is trading at a premium to existing market prices, should you invest in it?

"SGB is for investment purpose and the minimum investment period required for the same is five to seven years. So we are still recommending to invest in SGB, as it gives 2.5 per cent guaranteed return. Currently, gold is in the bull run so investors with a longer horizon may invest in this product," says Anuj Gupta- DVP- Commodities and Currencies Research, Angel Broking.

The broking firm expects gold prices to move higher towards Rs 56,000/10 gms mark by next Diwali. "The fundamental push for gold prices is in the form of lower interest rates and unprecedented amount of liquidity by central banks which will keep gold prices elevated," says Gupta of Angel Broking.

Nevertheless, if you are uncomfortable with investing in SGBs at higher than the market prices, you may give this series a pass and rather invest in gold ETFs or gold mutual funds.  Notably, Gold ETF category received net inflow of around Rs 597.3 crore in September and Rs 384.2 crore in October. This year so far, the category has received a net inflow of Rs 6,341.2 crore.

When to invest in SGBs

The Reserve Bank of India comes out with several series of sovereign gold bonds periodically in a financial year. The series that started yesterday is the 8th one this year. The issue price of the gold bond might be higher than the existing market prices, but there are two compelling reasons to invest in SGBs:

Interest income: The government gives 2.5 per cent interest on your gold investment semi-annually. This interest income twice in a year for eight years is over and above the price appreciation that happens in gold prices.

Tax-free returns: If you hold your gold bonds till maturity whatever capital gains you earn on your investments, you receive it tax free along with your principal amount. In gold ETFs or mutual funds, one has to pay long-term (after three years) capital gains tax of 20 per cent with indexation and short-term (before three years) capital gains as per your income tax slab rate.

"Safety, liquidity, and returns are few major criteria most risk-averse investors look for before investing. Gold meets these criteria without much hiccups in the long run. This is why it should be considered for investments. Investors may allocate 8-15 per cent of the portfolio in gold as an asset class and if digital mode is considered then SGB should be the preferred option as the cost of transaction is the lowest," says Omkeshwar Singh, Head- Rank MF, Samco Group.

Adhil Shetty, CEO at BankBazaar.com agrees. "The price of Sovereign Gold Bonds are linked to the price of 24k gold. The discounted price of Rs 5,127 of the latest tranche of SGBs is roughly the same as the price of 24k physical gold. SGBs hold a clear advantage over other forms of gold investing. Based on your investment needs, investment horizon, risk appetite and budget, you may choose to buy SGBs, ETFs, or MFs."

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