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‘Time to increase allocation to gold bonds’

‘Time to increase allocation to gold bonds’

25 Oct 2021

Mumbai: Investors could increase their exposure to gold through the upcoming tranche of sovereign gold bond offering starting on Monday. With inflationary pressures expected to result in uncertainty in equities, investment advisors suggest investors must raise gold allocation to as much as 15% of their portfolio.

In the seventh tranche of sovereign gold bond offering in the year ending October 29, investors will have to pay Rs 4,711 per gram the Rs 50 per gram discount for digital payments. This is 0.61% higher than Rs 4,682 per gram that they paid for in the previous issue in September. Gold prices have dropped 7% in the last one year.

“Sovereign gold bonds are one of the most efficient ways to allocate to gold, and given that prices could be soft, investors can stagger their investment over the next 4-5 months,” said Harshad Chetanwala, co-founder, MyWealthGrowth.

gold bond

Gold, which rewarded investors early in 2020 on account of uncertainty around Covid-19, has been drifting lower in the past year or so. Investors have been buying gold as a hedge against inflation and a weakening dollar. With inflation expected to rise due to accommodative policies from the governments and central banks, gold prices are expected to rise in the medium term.

As cheap liquidity dries up, it could result in a debt or housing crisis, which could spill over to the larger economy, said Chirag Mehta, fund manager, Quantum Mutual Fund, explaining why investors should buy more gold.

“Higher inflation could hurt consumer demand and slow down economic recovery. Corporate earnings supported by low factor costs will be under pressure; as interest rates and inflation inch up, which could result in stock market volatility,” said Mehta.

Investors could stagger their gold purchase in the four tranches of the sovereign gold bond issuances till March 2022.

Wealth managers believe sovereign gold bonds are one of the most efficient ways to own gold as long as investors do not need intermittent liquidity. They score over traditional modes like buying physical gold or gold ETF or gold funds as the bonds are backed by the government, fetch 2.5% interest every year, and have no storage costs. While there is an option of the government buying back at the end of the fifth year, many rich investors like the product because capital gains are tax-free on maturity.