Sovereign Gold Bond: A good hedge against rupee, rising inflation
The Sovereign Gold Bond (SBG) Scheme 2020-21 series has its seventh tranche (SBG 2020-21 Series VII) open and running till Friday. There will be another issue next month. If bought online, this tranche is offered at Rs 5,051/gram with a discounted price of Rs 5,001. The current spot price of gold is Rs 5,055. The SBG has an eight-year maturity period, with redemption allowed after five years. It offers interest unlike the physical metal and it’s dematerialised, which takes care of storage. It has fair liquidity.
Investors looking to invest in Gold should take this route to avail dual benefits – avoid any overhead cost while buying/selling as compared to investing in physical gold, and benefit from the assured 2.5% interest payable per annum. Any portfolio should consist of Gold anywhere in the range of 10-15% or based on the risk-taking appetite of the investors.
The bonds are traded in the secondary market. However, this is usually at substantial discounts to the India Bullion and Jewellers Association (IBJA) rates for .999 purity gold, which is underlying. Loans are readily available against the SBG. The bond offers a 2.5% interest calculated on the subscription price.
Apart from subscription to the primary issue, it is possible to pick up the 40-odd previous issues on the secondary market. That may be a discount to the current price. Redemption for some of the earlier series start in 2023. So, investors could lock in a reasonable profit in theory. However, many of the tranches are not liquid in the secondary market.
If you’re subscribing to a primary issue, you’re taking a call on the price of gold in eight years, or rather in five years, when the exit is allowed. Historically, gold is seen as a haven in times of uncertainty, and as a hedge against inflation. It holds up well during inflationary periods, and during the crisis.
Gold is considered as a safe haven and a hedge against inflation, investors will continue to flock until clarity emerges on the global economic recovery. Post touching life highs of over Rs 56,000/10 gm, the Gold price has corrected to trade near Rs 51,000 levels.
The hope of the latest stimulus package by the US government getting cleared has given a push to Gold prices.
Moving forward, US election outcome and its impact on the USD, clarity on the vaccine will give broader direction to the yellow metal.
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