Should one invest in sovereign gold bonds?

The last time the government announced a tranche of sovereign gold bonds (SGB), there was so much uncertainty due to the trade wars and US Fed's hint of pausing rate hikes.

It was a time when China was championing free trade and the US (politically motivated) was driving its economy the other way. A year back, the world was a completely different place though.

Also, the US Fed was offloading their assets accumulated post the Great Financial Crisis (GFC).

This time, a new tranche of SGB is coming in the backdrop of an extended lockdown by the government till May 3 and amid very volatile times that we've ever seen in our lifetimes.

The world is now being rocked by Covid-19 which is affecting individuals' health and impacting the economies across the world.

Through last few weeks, we've witnessed huge unpredictability in terms of the prices of stocks, bonds and almost all asset classes. Gold has shown amid all this turmoil and despite the price volatility.

Governments across the world have coordinated economic stimuli and the central bankers have coupled it up with benign monetary policies so as to absorb the negative implications of the oncoming economic damage due to the closed economic activities, interrupted productivities and contracting health of the world humanity.

The unlikely clarity of the end of this chaos is only adding up to the woes of the investors and advisors alike.

For the latest tranche of SGB, the central government fixed the price at Rs 4,639 per gram, which is way higher than the last time as these bonds are linked to the market rates of gold.

The latest tranche of scheme is opening up for subscription from April 20 to April 24, 2020. Gold prices have remained on an ascent in the last few months over the prospects of the economic growth and then the debilitating virus outbreak virtually shut the whole world.

India has remained one of the highest consumers of gold for decades primarily due to the lure for jewelry by the households.

The lockdown has impacted the usual seasonal purchases (weddings, etc.) but the price of gold has been increasing due to the increased price internationally and also the strengthening of US dollar has added the impact domestically.

These bonds are being issued by the Reserve Bank of India (RBI) to wean away the interest of the consumers towards physical gold thus reducing the import bill for the govt.

The tenor or tenure of these bonds is for a period of 8 years with an exit option from 5th year onwards, the call (exit) option should be exercised on the interest payment dates only.

These bonds could be invested by individuals, HUFs (Hindu Undivided Family), trusts, universities and other charitable institutions.

These bonds are denominated in units of one gram of gold and multiples thereof with a minimum permissible investment of 1gm of gold.

The maximum limit for subscription is 4 kg for individuals and HUFs while it's 20kg for trusts & other institutions. These bonds come with an interest of 2.5 per cent payable semi-annually. This is turning very attractive in this falling interest rate regime.

The nominal value of the bond based on the simple average closing price (published by the India Bullion and Jewelers Association Ltd) for gold of 999 purity of the last three business days of the week preceding the subscription period.

RBI in its release further said that govt has decided to offer a discount of Rs 50 per gram to those investors applying online and where the payment against the application is made through digital mode.

For such investors, the issue price of bond will be Rs 4,589 per gram of gold. SGBs are sold through banks (except small finance & payment banks), designated post offices and recognized stock exchanges (BSE & NSE).

The tax treatment of the interest earned on these bonds is considered as per the capital gains. There is no capital gains tax upon redemption, but an indexation benefit is provided for investors trading these bonds.

These bonds could be used as collateral for loans. The other important feature of these bonds is the transferability which are treated at par with that of provisions of the Government Securities Act.

These bonds are tradable on the stock exchanges within the fortnight of the issuance date. As a robust portfolio in the medium to long term, one could use these bonds as a good diversification tool.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])