Should you invest in sovereign gold bonds?

As per the RBI press release dated April 13, 2020, Sovereign Gold Bond (SGB) 2020-21-Series VI—which is open for subscription from August 31 to September 04—could be the last issuance in this fiscal. The issue has come at a time when, gold has corrected 8-10% from its all-time high in early August.

Should you invest? The issue price of series VI is 4% lower than that of the previous series, which was launched in the first week of August.

Gold makes a good choice from the portfolio diversification point of view; but that’s a general observation. A question many investors are asking nowadays is whether they should invest in gold at this juncture? After all, the precious yellow metal is still a pricey affair even after considering the recent price correction.

So the question actually has two facets;

Whether one should buy gold at this juncture?

And

If yes, is series VI of Sovereign Gold Bond the right choice?

Let’s discuss…

Here’s what best describes the gold market under the current market conditions:

The desire of gold is not for gold. It is for the means of freedom and benefit— Gerald M. Loeb

In the current context, the world desperately seeks freedom from the coronavirus pandemic and the mounting recessionary pressure. Cushioning the downside risks at the portfolio level is a priority for investors across the globe.

Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold Robert Kiyosaki

If you  introspect on the present, quite a few countries, including world’s two most populous nations, are dealing with boarder disputes and many cities are fuming over issues pertaining to religion and race. At a time when health and trust have hit a low, gold has yet again proved itself a safe haven.

Add to the above a famous wall-street saying: Don’t fight the Fed. In simple words, your asset allocation should be tactically aligned to that of Fed’s policy actions.

As you would appreciate, the Fed’s policy affects all dollar denominated assets, including US stocks, treasuries, industrial metals and even precious metals, such as gold and silver. Interest rates in the US and gold share an inverse co-relation; i.e. when interest rates are low, gold remains strong and vice-versa. At this juncture, the Fed has made it amply clear that it would rather allow policy rates to be lower, to support employment and inflation targets. Government guarantees on loans has opened a whole new chapter—a topic that merits a separate discussion.

Many would argue that even the stock markets are up these days. Well, it’s noteworthy that in the absence of economic recovery and impressive growth in corporate earnings, stock markets have been gasping for fresh air. Didn’t stock market indices appear exhausted even before the coronavirus hit the global economy in February-March this year?

Unlike equities, gold has gone from strength to strength to end its 10-year long bear market run recently, by making a new high in dollar terms.

RBI too is accumulating gold

Gold is a strategic asset for any country, including India, and over the last few years, RBI has been a buyer of gold.

According to various media reports, RBI aims to further diversify its forex kitty and intends to increase the weightage of gold to 10%. Why? Any guesses?

India ranks fifth on foreign exchange reserves globally, only behind China, Japan, Switzerland and Russia. At present, India has an import cover of over a year—i.e. it’s sitting on reserves that could easily cover the country’s imports for more than a year. If India aims to become Atma Nirbhar and substantially reduce its deficit with China, hoarding high foreign currency assets may not be a sensible move, especially when the interest rates are likely to remain ultra-low in the developed economies.

All these factors suggest that, the recent correction in gold could be a comma and not the full stop in its northward journey and thus, presents an opportunity to accumulate the safe haven asset.

Now about sovereign gold bonds…

If you buy gold in any other form, it won’t generate regular income for you. At best, you can pledge your physical gold with a lender and obtain a line of credit.

Advantages of investing in sovereign gold bonds (which are not available in other avenues)

  • It pays you 2.5% p.a. interest on the nominal value.
  • If you hold sovereign gold bonds until their maturity, the capital gains, if any, will not attract any tax liability. However, the interest is entirely taxable.

Verdict

Subscribing to Sovereign Gold Bond (SGB) 2020-21-Series VI seems an intelligent choice at a time when the global economy is reeling under a massive recessionary pressure. Depending on your long term goals, risk appetite, liquidity preferences and overall asset allocation, you may decide how much to invest.

You may also like to read: Are markets enjoying their jio ram bharose moment?

 

Disclaimer

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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