Sovereign Gold Bond opens today: What can you expect amid falling gold prices?

The second tranche of Sovereign Gold Bonds (SGBs) for the financial year 2023-24 will be open for five days beginning today. The SGB Scheme 2023-24–Series II will be available for subscription with prices set at Rs 5,873 per gram of gold after a discount of Rs 50. The Reserve Bank of India (RBI) administers the SGB issue on behalf of the government as an alternative to purchasing physical gold.

If you considering investing in gold as the festival season approaches, you can consider investing in SGB, which is available at a discount of Rs 3 compared to the previous tranche. Historically, gold has been a hedge against inflation and volatility. The yellow metal has given a return of around 16 per cent during the last one year. In dollar terms, it has given returns of 12 per cent. However, investing in gold should be considered from an investment diversification perspective, as gold prices can exhibit sub-optimal returns over extended periods.

Gold prices opened on the Multi Commodity Exchange (MCX) on Monday at Rs 58,950 per 10 grams and hit an intraday low of Rs 58,930. In the international market, prices hovered around $1,922.95 per troy ounce

The outlook for gold remains range bound, particularly given that the interest rate hike cycle, especially in the US, appears to be on pause. A recommended allocation range to gold is typically 5-15 per cent of the portfolio. Therefore, investors may consider maintaining around 5-10 per cent allocation to gold. If opting for SGBs, a long-term investment horizon is advisable to maximise their benefits.

Let’s consider some of the advantages and disadvantages of investing in SGBs:

Benefits of investing in SGB 

Safe-Haven Asset: Considered a safe-haven asset, gold bonds are issued by the RBI on behalf of the central government

Storage and Security: There are no concerns of storage or security as SGBs are held in dematerialised form

Interest Earnings: Investors receive 2.5 per cent interest per annum, paid semi-annually, and maturity is linked to the market price of gold

Tax Benefits: SGBs offer tax benefits, including exemption from capital gains tax if held until maturity. Unlike gold funds and ETFs which are taxed according to your income tax slab as capital gain, SGBs are tax-free if held till maturity

Points to keep in mind 

Market-Dependent Returns: Returns on SGBs are not guaranteed and depend on the prevailing market price of gold at the time of sale

Lock-In Period: There is a lock-in period of 5 years; you cannot exit your investment before then. To avail of the capital gains tax benefit, it's eight years

Exit Options: You can exit after a minimum of 5 years, and if held in demat form, it is tradable on stock exchanges. The exit price depends on the prevailing market price of gold.