Sovereign Gold Bonds are back; but is the time ripe to buy gold?

The government has announced complete tranche of gold bond issues for the first 6 months of the fiscal. Here are some of the key features of SGB-Tranche 1.

Apr 22, 2020 08:04 IST India Infoline News Service

Gold bonds are here with a 6 months’ time-table and that brings us back to the larger question, whether one should buy gold bonds or any form of gold investments at current prices. The chart captures the journey of Indian gold prices over the last one year.

India Gold Prices (24 Carat) in Rs./10 grams for 1 Year

Data Source: Google Finance

Indian gold prices (24 Carat / 10 grams) are at an all time high. This is a slight divergence from the global gold prices. Global gold prices had touched a high of $1879/oz in 2011 and currently trades at $1700/oz, still 10% away from its all time peak. It is in this background that we take a look at the Sovereign Gold Bonds issue.

Sovereign Gold Bonds – 2020-21
Unlike in the past, the government has announced the complete tranche of gold bond issues for the first 6 months of the fiscal as under.
Data Source: SBI

The price of each of the gold bond issues will be determined based on the prevailing price of gold at that point in time. Here are some of the key features of SGB-Tranche 1 as above.
  • The price for this tranche has been fixed at Rs4,629/gm and will be issued by the RBI on behalf of the government of India.
  • The gold bonds will carry interest at 2.5% per annum and such interest will be payable on half yearly basis. Interest will be taxable at extant rates.
  • The bonds will have a lock-in period of 8 years. However, exit option can be exercised from 5th year onwards. Capital gains tax exemption is available if held for 8 years.
  • Minimum investment in the SGB will be 1 gram and maximum investment per individual is restricted to 4 KG.
  • Bonds will be traded in the secondary markets within a fortnight and such bonds can also be used as collateral for loans.
Investors have the facility of buying gold via SGBs or gold ETFs. However, gold bonds offer the additional advantage of 2.5% interest rate and the guarantee of the government.

But is this the right time to invest in gold?

The 20 year price chart of International Spot Gold shows some interesting trends.
Year Closing Price ($/oz) Yearly High ($/oz) Yearly Low ($/oz) Yearly Returns
2000 $272.65 $316.60 $263.80 -6.26%
2001 $276.50 $292.85 $256.70 1.41%
2002 $342.75 $348.50 $277.80 23.96%
2003 $417.25 $417.25 $319.75 21.74%
2004 $438.00 $455.75 $373.50 4.97%
2005 $513.00 $537.50 $411.50 17.12%
2006 $635.70 $725.75 $520.75 23.92%
2007 $836.50 $841.75 $608.30 31.59%
2008 $865.00 $1,023.50 $692.50 3.41%
2009 $1,104.00 $1,218.25 $813.00 27.63%
2010 $1,410.25 $1,426.00 $1,052.25 27.74%
2011 $1,574.50 $1,896.50 $1,316.00 11.65%
2012 $1,664.00 $1,790.00 $1,537.50 5.68%
2013 $1,201.50 $1,692.50 $1,192.75 -27.79%
2014 $1,199.25 $1,379.00 $1,144.50 -0.19%
2015 $1,060.20 $1,298.00 $1,049.60 -11.59%
2016 $1,151.70 $1,372.60 $1,073.60 8.63%
2017 $1,296.50 $1,351.20 $1,162.00 12.57%
2018 $1,281.65 $1,360.25 $1,176.70 -1.15%
2019 $1,523.00 $1,542.60 $1,270.05 18.83%
2020 $1,695.80 $1,717.85 $1,472.35 11.35%
Data Source: GOLDPRICE.ORG

As we can see from the table above, gold prices in 2020 are still 10% short of the peaks made in 2011, but we need to remember that international gold prices in the last one year have rallied by over 32%. In the light of the uncertainty created by the COVID-19 and the likely pressure on output and equities due to the GDP contraction, gold is likely to remain an attractive asset class. Between 2001 and 2012, gold saw one of the longest and most consistent rallies. In short, gold could still have steam left if the global uncertainty continues.

Gold is less about right time and more about right allocation

One common narrative that is touted is that gold gives positive returns when equities give negative returns. This relationship holds in a shorter time frame, but not necessarily in the longer time frame. Over the last one year, the DJIA has given (-10%) returns while gold has given 32%. But if you look at a 5-year period, both the DJIA and gold have given around 35% returns. The alternative is to have an allocation to gold in your financial plan.

How much to allocate gold? Remember, we are talking about gold as an investment so this will exclude gold jewellery. We are talking about investments in various forms of gold like gold bars, coins, gold ETFs and sovereign gold bonds. Gold allocation should ideally be maintained in the range of 10% to 15%. When global uncertainty is high or geopolitical risk is elevated then 15% allocation could be a good idea. If the allocation goes way off this range, then gold should be rebalanced. The idea here is to protect the portfolio in volatile times and not so much about making money out of gold. That should remain the underlying theme of gold allocation; in whatever form it may be.

Know all about Sovereign Gold Bonds

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