Sovereign gold bonds issue X is open: Should you invest now?

As the global financial markets turn volatile, investors turn towards gold in search of safe haven. Sovereign Gold Bond (SGB) Scheme 2021-22-Series X has opened for subscription on February 28. It will remain open till March 4.

What’s on offer? 

The SGBs in Series X will be issued at Rs 5,109. Each bond will track the price of one gram of gold. There is a discount of Rs 50 per bond if you apply using digital mode.

The tenure of the bond is eight years and, at maturity, investors are paid an amount equal to the one gram price of gold prevalent at that time. The gains are tax free if the SGBs are held till maturity. In addition, there is a coupon of 2.5 percent payable semi-annually on the nominal value. The interest earned is taxable at the slab rate of the investor. These bonds are traded on the stock exchanges.

Are investors looking beyond gold?

Investors tend to allocate more to the assets which have done well in the past. Gold’s past performance, a loss of 4.8 percent in CY2021 makes it less attractive for most investors. At the same time, risky assets such as stocks and digital assets including cryptos saw price appreciation. Investors seen preferring those over gold.

“Maybe cypto assets have taken the sheen out of gold,” says Rupesh Nagda, Founder and Managing Director, Family First Capital. He foresees Indian investors looking at digital virtual assets (DVA) as an investment seriously. “The tax on digital virtual assets eliminates the uncertainty around the future of DVA in India. Now the investors know that the government won’t ban these crypto assets altogether. That makes them some serious competition to gold in India,” he adds.

Launch of silver ETFs in India is another variable that is expected to influence the behavior of many investors. Earlier most Indian investors looking for some bullion allocation – would end up allocating money to gold and some part of that would come to gold ETF or gold funds. Going forward things may change. “As of now we have not come across investors switching from gold to silver. But bullion segment of the portfolios of many investors may see some allocation to silver ETF along with gold ETF in future,” says Anup Bhaiya, Managing Director, Money Honey Financial Services.

Investors’ actions

Outflows from Indian gold ETFs in January 2022 can’t be attributed to a single factor as of now, nor they at alarming levels. Indian investors are seen buying gold ETF with overall inflows of Rs 4,813 crore in CY2021, with just one month recording a net outflow. Globally investors however chose to walk away from gold. Gold ETFs globally saw net outflows of US$9.1 billion in 2021.

After a lull in CY2021, gold prices have taken support at lower levels on the back of strong consumption demand in last few months in key markets such as India and China. Investment demand is also seen coming in the developed markets. “Increased buying of physically-backed gold ETFs was a notable shift in sentiment,” said gold market commentary released by World Gold Council. “Increased geopolitical risk, due to rising tension between NATO members and Russia over Ukraine, helped keep uncertainty high. Gold tends to be supported when geopolitical tensions escalate and is another reason why gold is a good diversifier in any portfolio,” it added.

Will gold shine in 2022?

Gold prices were range bound in the first month of the CY2022, but  gold traded at Rs 50,221 per 10 gram. The increase in interest rates by US Federal Reserve is round the corner and most central bankers in the world are contemplating raising interest rates, if they have not already. The FOMC meet outcome made gold prices volatile for a brief period of time but gold prices did not fall much.

Rising interest rates tend to act as a headwind for gold. But if the inflation remains sticky and the interest rate hikes trails rate of inflation, then the real interest rates remain negative, which work in favour of gold. Also the Russian aggression against Ukraine is may rule out the 50 basis point hike in interest rates by US Federal Reserve in March.  “Negative real interest rates along with central bank gold buying spree, increase in physical demand, geopolitical tensions, distress in China’s Property sector can be positive for gold prices,” says Navneet Damani, Head Research-Commodities and Currencies, Motilal Oswal Financial Services. He foresees gold touching Rs 55,000 mark over next 12 months.

Nagda also sees inflation driving gold prices and advises investors to allocate 5 to 10 percent of the money to gold through select gold ETF or gold mutual funds. “Low liquidity in secondary market makes us stay away from sovereign gold bonds,” he explains.

“Gold is one of the most attractively valued asset class at this moment. If you are worried about possible volatility in equity markets due to geo-political tensions or rising interest rates world over, then it is time to allocate some money to gold,” says Bhaiya.

Should you invest in SGBs?

SGB works the best for long-term investors who are keen on an exposure to gold to diversify their portfolios. Ideally you should be holding the SGB till maturity.

Despite increased awareness, increased participation by investors and improved liquidity on the stock exchanges, there is no assurance that these bonds will trade at fair value on the stock exchanges.

You can also check the prices of SGB issued earlier and trading on the stock exchanges. You may get some deals at discount. Check the residual tenure to maturity before investing. Also be careful while placing buy order on the exchange, since the volumes are low and gold prices are too volatile.