Sovereign Gold Bond Scheme 2022-23 Series II open for subscription. Should you invest?

The issue is open till August 26. The bonds will be issued on August 30. The SGB will have a tenure of eight years. After the end of five years, you have the option to surrender them on the interest payment dates.

Each bond will track the price of one gram of gold. The price at the time of the issuance will be Rs 5,197 per gram. If you pay using digital means, there is a discount of Rs 50 per gram. The bond pays an interest of 2.5 percent per annum, payable half-yearly, on the price at the time of the issue.

The interest is taxable in the hands of the investor. At the time of redemption, the then prevailing price of gold per gram is paid as the maturity value. If you hold till maturity, capital gains are tax-free. Since the bonds trade on the stock exchanges, they can be sold.

In such cases, investors can avail indexation benefits while computing long-term capital gains, if the bonds are held for more than three years and pay tax at 20 percent.

But what about gold prices?

Though the sovereign guarantee and the interest payout at regular intervals make the SGB an attractive bet, investors should not ignore the underlying –gold. Gold prices have come down. They went up to Rs 54,150 per 10 gram on March 8, 2022, when investors were worried about the outcome of the Russian invasion of Ukraine. Since then, gold prices have been moving southwards.

“Investors were worried about very high inflation, uncertainty around the global economy and the Russia-Ukraine conflict. As a result, gold prices were expected to go up. However, a strong dollar, on account of rising interest rates in the US, prevented any emphatic rise in gold prices. On the contrary, it declined,” says Dr Joseph Thomas, Head of Research, Emkay Wealth.

“When the US dollar gets stronger against other major currencies, it is negative for gold prices, as gold is denominated in dollar terms,” he adds. There is very limited upside for gold from the current levels in the immediate future, he says.

Gold prices, in rupee terms, have seen limited downside in the recent past as the rupee turned weak against a strong dollar. In the Mumbai spot market, gold is quoted at Rs 52,250 per 10 gram.

Megh Mody, Commodities and Currencies Research Analyst, Prabhudas Lilladher, says: “The MCX gold prices can plunge below Rs 50,000 and reach the zone of Rs 48,500. In the next one year, it is likely to remain in the range of Rs 48,500-52,500 levels.”

Why SGB makes sense

SGB is the only well-regulated gold-linked instrument that pays regular interest. Since it is backed by sovereign, it is an effective way to take exposure to gold prices.

Roshni Nayak, SEBI-registered investment advisor and founder of Goalbridge, a Mumbai-based financial planning firm, says, “SGB can be a good investment, provided the investor is keen on taking exposure to gold for the long term. Ideally, one should hold them till maturity to ensure tax-free gains.”

Should I invest or not?

While gold is an important asset class, the best way to take exposure is through financial investments. SGB is one of the better avenues to do that, provided you have a long-term view. Though the SGB is listed on the stock exchange, it may not trade near the fair value. If you have a shorter time frame, of, say, less than five years, you are better off investing in gold ETF or gold savings funds. Nayak advises restricting exposure to gold to 5-10 percent.

Gold can be an effective diversifier in your portfolio. Do not chase it for returns, nor shun it, because the prices are on their way down in the recent past. If you are keen, do take a look at the existing issues of SGB in the stock market.

If you find an attractive alternative, the same can be bought into, provided your time frame matches with the maturity date of the listed SGB.