As markets turn topsy turvy, sovereign gold bonds offer hopes of a safe haven

As markets turn topsy turvy, sovereign gold bonds offer hopes of a safe haven
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  • Sovereign gold bonds (SGBs) are issued by the Reserve Bank of India, and allow you to invest in gold indirectly. RBI’s latest SGB tranche opened for subscription on March 6 and closed on March 10.
  • SGBs offer benefits like exemption from capital gains tax on redemption, interest on investment, and no GST on purchases.
  • SGBs, according to the analysts at ICICI Direct, are the best way to take exposure to gold as an asset.
  • Despite the recent volatility in gold prices, analysts have maintained their positive outlook on gold.
Sovereign gold bonds (SGBs) are in the news now with the launch of the latest tranche of bonds from the Reserve Bank of India (RBI), subscription for which opened on March 6 and closes on March 10. While SGBs are not new, the attractiveness of gold as an investment has brought them into focus.

Analysts at ICICI Direct say that with the current rate hike cycle nearing its fag end especially in the US, their outlook on gold as an asset class remains positive, despite a 13% run up in gold prices in the last four months.

“Currently it is time to be equal weight in the overall asset allocation as while historical return is higher, the outlook stays positive given we are at the fag end of the interest rate hike cycle particularly in US,” said a report by ICICI Direct, adding that they recommend investors to allocate 10% of their capital to gold.

Investing in gold – physically, digitally, and through SGBs

There are multiple ways in which gold investments can be made including – physical gold purchases, digital gold and sovereign gold bonds (SBGs). While physical gold purchase is straightforward, digital gold can be purchased through banks and payment apps that have tied up with companies like MMTC, SafeGold and others.


Gold exchange-traded funds (ETFs) are also a possible investment route for people who want exposure to gold, but they come with their own issues like – tracking errors, management expenses, and they also attract capital gains tax depending on the tenor of holding.

SGBs, according to the analysts at ICICI Direct, are the best way to take exposure to gold as an asset.

But what exactly are SGBs? Simply put, these are government securities denominated in grams of gold. Like digital gold, investors do not get to see or feel their purchases. However, SGBs have a few advantages over digital gold, including – a 2.5% interest on the amount invested, no capital gains tax on redemption, and no GST on purchases.

RBI is also offering a discount of ₹50 per gram of gold in its latest SGB tranche if payment is made via digital means. This brings down the effective price to ₹5,561 per gram, as against the issue price of ₹5,611.

It is worth noting that to take full advantage of the benefits of SGBs over other modes of investing in gold, investors will have to hold the bond till maturity, since capital gains tax is exempt only on redemption. However, investors can still sell these SGBs in the secondary market in case they need to, but that will attract capital gains tax.


Gold outlook positive despite recent volatility

Gold as a safe-haven investment has been in demand ever since the pandemic and is a good hedge in the current high-interest-rate environment.

“Indian gold prices, on the other hand, have been more structural and stable. Gold has not just seen higher buying interest during uncertain periods like recent Covid-19 related concerns or any geopolitical tension, it has been a long term performing asset class, especially in the Indian context,” said another report by ICICI Securities.

However, gold prices have slipped more than 5% in February on strong economic data that boosted expectations of more rate hikes. With this, analysts expect prices to remain volatile in the near term at least till the rate hike cycle does not end. The rate hike cycle is expected to pause at the end of the year.

Analysts expect demand for gold as a safe-haven investment to remain positive in the expected uncertain environment.

In the medium to long term, the US could witness an economic slowdown or recessionary conditions, as the lagged effects of the monetary tightening show up on the economy, said Ghazal Jain, fund manager, alternative investments at Quantum AMC.

“In this situation, gold will be relatively better placed than risk assets. The growth setback is expected to make the Fed cut rates either by the end of 2023 or Q1 2024. That environment will be really bullish for gold prices," added Jain.

The ICICI Research report suggests that the gold price may reach ₹68,000 level over 2-3 years and therefore investors should continue investing.

Mild recession and weaker earnings have historically been positives for gold. A further weakening of the dollar as inflation recedes could provide support for gold.


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