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Sovereign gold bond issue opens on Monday. Should you subscribe?

Sovereign gold bond issue opens on Monday. Should you subscribe?

10 Jul 2021

MUMBAI: The Reserve Bank of India will open the fourth tranche of the sovereign gold bond issue for public subscription on Monday. After the success of the first three tranches, the government has priced the fourth tranche at a slightly lower price than the previous issue.

Investors, who wish to subscribe to the issue, can bid for a minimum of 1 gm of gold at Rs 4,807 against Rs 4,889 per gm in the previous tranche. For those investors who apply for the new tranche online, the government will offer a Rs 50 per gram discount.

The fourth tranche will close for subscription on July 16.

Sovereign gold bonds are popular instruments among investors who want to have exposure to gold but do not want to hold it in physical form. A SGB is a paper issued by the government and is denominated in terms of grams of gold.

The SGB is issued in exchange for cash from the investor by the Reserve

and is also redeemed in cash. The redemption of the bond happen at the prevailing price of gold thereby, protecting the quantity of gold purchased by the investor.

Other benefits of subscribing to SGB include elimination of risk and cost of storage, exemption from capital gains tax if held till maturity and a hassle free holding as it eliminates the storage cost of physical gold.

Analysts suggested that the interest in the fourth tranche could be high due to a fall in the issue price from the previous tranche despite recent firmness in global gold prices.

International gold prices have found their mojo in recent weeks amid rising concerns over the spread of the Delta variant in many advanced and emerging economies. The spread of the new variant is threatening investors’ expectations for strong global economic growth in 2021.

The next big trigger for gold prices will be the Fed meeting later this month, rising inflation in the US is a cause of concern and any change in the stance on interest rates or liquidity by the Fed will have its impact on the prices, said Nish Bhatt, founder and chief executive officer at Millwood Kane International.

On Friday, the price of 1 gm of 999 finesses gold ended at Rs 4,786, as per India Bullion and Jewellers Association’s website.

Investors who wish to subscribe to the issue can do so via their bank. Besides, these bonds are also sold through Stock Holding Corporation of India, designated post offices, National Stock Exchange of India and BSE, either directly or through agents.

Investors would get a 2.50 per cent interest on the amount of initial investment, which will take effect from the date of its issue and will be payable every six months. Besides, they can also see capital gains at the time of redemption, in case the price of gold at the time of redemption is higher.

The tenor of the bond will be for a period of eight years with exit option in 5th, 6th and 7th year, to be exercised on the interest payment dates. Besides, bonds will be tradable on stock exchanges within a fortnight of the issuance, though, the liquidity is usually low on exchanges.