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Gold@1-month low. Should you subscribe to 5th tranche of SGBs opening on Monday?

Gold@1-month low. Should you subscribe to 5th tranche of SGBs opening on Monday?

07 Aug 2021

NEW DELHI: The fifth tranche of sovereign gold bonds (SGB) scheme 2021-22 will open on Monday, with the issue price set at Rs 4,790 per gram of gold.

For investors applying online and paying through digital mode, a discount of Rs 50 per gram (at Rs 4,740 per gram) is applicable. Gold prices have seen some correction and analysts say the drop below Rs 46,500 per 10 gm level can lead to more weakness in the short term. But investors looking to buy SGBs for the long term should not get concerned about it, they said.

RBI will issue these bonds on behalf of the government. The issue will close on Friday.

Sugandha Sachdeva, Vice President at Broking, advised potential SGB investors to do staggered buying, as the long-term outlook for gold is positive and provides diversification benefits to one’s portfolio. However, one should refrain from investing the entire investable money in SGBs at current level, she said.

The government had earlier announced six tranches of SGBs offering from May to September last year.

Sachdeva said the recent strong US economic data has sent the dollar rising, leading to a drop in gold’s safe-haven appeal, with Rs 46,500 per 10 gm emerging as a key support on a closing basis, breaking which one can expect some more correction.

“But SGB is a long-term investment and one must avoid treating it as a short-term trading bet. A reversal in the interest rate cycle in the US is still away, which bodes well for gold prices. Sticky inflation in the US on account of higher input cost is a concern and will be positive for gold prices. Besides central banks have again started buying gold, unlike the last year when they were selling it at higher prices, she noted. Add to that the expensive equity valuations and uncertainty over a possible third wave of Covid-19, and all these can be positives for gold prices,” She said.

Sovereign gold bonds (SGBs) offer an alternative to physical gold investment, wherein investors enjoy capital appreciation in addition to earning interest semi-annually. These bonds are issued by the Government of India and, thus, eliminate risks associated with physical gold.

“Investment in non-physical gold, via digital or paper gold, is highly recommended, as it provides high liquidity, no storage cost, and is easier to sell vs physical gold. Investment in SGBs comes with an interest coupon payable semi-annually. Investment in SGBs is a superior alternative to physical gold. Investing in non-physical gold can help the government keep a check on the currency and larger fiscal deficit,” said Nish Bhatt, Founder & CEO at Millwood Kane International.

The fourth tranche of SGB 2021-22, which was sold from July 12 to 16, was offered at Rs 4,807 per 10 gm , and the May tranche was sold at Rs 4,889 per gm.

Bhatt said gold prices have softened in the past few weeks to touch a one-month low and they have dropped nearly Rs 1,000 per 10 gm in value terms in the past one week.

A rising dollar and treasury yields amid hopes of sooner-than-expected policy tightening by the Fed have largely led to softening of gold prices, he said, adding that the latest variant of the virus, the pace of vaccination, unlocking, and signs of policy tightening by the Fed will guide gold prices going forward.

How do the SGBs work?
Investors can subscribe to SGBs during primary issuance by paying the prevailing price of gold. Upon allotment, these bonds are held in the demat account.

For this tranche, investors would receive fixed interest of 2.50 per cent per annum on investment value. On maturity, they would receive redemption proceeds at the prevailing gold price. Thus, SGBs offer gold-linked returns to investors.

The tenure of the bond is eight years. But since each tranche of SGBs is listed on stock exchanges, investors can liquidate their holdings before maturity, if they wish to.

If they continue to hold it till maturity, capital gains arising on redemption is tax-exempt.