It’s always beneficial to diversify your portfolio to benefit from diversification, helping to reduce the risk of the overall portfolio. And what’s better than Gold to invest in. Being Indian, we have always heard that gold is the safest investment followed by Real Estate. We will talk about real estate later but let’s focus on gold for now since the fourth tranche of sovereign gold bonds 2020-21 is opened for subscription on Monday (July 6) – and will be open until Friday (July 10). The government has fixed the issue price of the bonds at Rs 4,852 per gram during the subscription period. A discount of Rs 50 per gram on the issue price is being offered to investors who apply online and pay digitally. The bonds are restricted for sale to resident individuals, Hindu Undivided Families (HUFs), trusts, universities and charitable institutions.
Issue Price - Rs 4,802.00 (After a discount of Rs 50)
Minimum Bid Quantity- 1 (gram)
Maximum Bid Quantity- 4,000 (grams) for Individual, HUF
What are Sovereign Gold Bonds?
Sovereign gold bonds are RBI mandated certificates issued against grams of gold, allowing individuals to invest in gold without the strain of safekeeping their physical asset. Sovereign gold bonds act as a secure investment tool among individuals, as gold prices are less susceptible to market fluctuations. Owing to the popularity and widespread demand for gold, prices of such assets tend to rise significantly over time, a highly prospective investment avenue.
What are the benefits of buying gold bonds?
Fixed Interest Rate along with price appreciation benefit- Gold bonds offer investors twin benefits of price appreciation along with a fixed 2.5 per cent coupon per year.
Tax Benefit on the Returns- Interest earned on these gold bonds is added to the holders’ income, and taxed according to their slab rate. Any capital gains on these bonds at maturity are tax-free, making them far more attractive than owning physical gold.
Exit Plan- Gold bonds have a maturity period of eight years, but investors have the option to exit after the fifth year. To offer greater liquidity, the bonds are listed on stock exchanges within a fortnight of issuance and can be traded. However, trading volumes depend upon liquidity in the secondary market.
How has gold performed?
Gold bonds appear attractive when gold prices spike, leading to greater investor interest in this asset class. Much before Covid-19’s impact reverberated across economies and led to a crash in global stock markets, gold prices had started their upward glide. The global spread of Covid-19 has raised concerns on global growth over the last three or four months. Negative growth rates and fears of a global recession have pushed central banks and big investors to take shelter in gold.
Gold is a very safe form of investment and has given a 165% return in the past 10 years (Source: BSE).
Should you invest in gold?
Two main reasons for investing in gold are-
The decline in Interest Rates
Negative beta and diversification benefit
The decline in Interest Rates
In India, a sharp decline in interest rates over the last one year – and more so over the last three months – alongside high volatility in the equity markets, have brought investor focus towards gold. A cut in interest rates by the RBI has led to a decline in interest rates on small savings and term deposit rates of banks. SBI is currently offering an interest of 2.7 per cent on savings bank deposits, and 5.4 per cent on 5-10-year term deposits. Experts say that it makes good sense for investors to invest in gold. “At a time when bank interest rates have fallen sharply, sovereign gold bonds offering 2.5 per cent interest is an attractive proposition. Besides, there can be capital gains and it acts as a hedge against rupee depreciation,” George said.
Negative Beta
Many experts believe (at least some of them do) that Gold has a Negative Beta*. Beta is calculated for every stock or commodity in the market to help an analyst interpret its price movements in correlation the market prices. However, there’s been a long-lasting debate on whether a negative beta should be assigned to Gold or not. Statistics (shown in the table above) indicate that when the market has crashed, Gold has always been considered a safer investment and is least affected. Generally, when the market is bearish, investors like to sell their stocks and search for stable returns like Gold, Government securities, AAA Bonds, etc. and vice-versa. It’s not that Stock market prices and Gold prices are always opposite. But it is no brainer that the Indian market works on sentiments and herd mentality and hence, Gold shows to be a perfect fit to a portfolio at the time of recession. Thus, justifying that Gold has a Negative Beta which makes it a worthy part of portfolio helping reducing overall risk.
*Negative Beta- It means that the price of gold moves in a direction opposite to stock market.
Will gold prices continue to rise?
While gold by itself does not produce any economic value, it is an efficient tool to hedge against inflation and economic uncertainties. It is also more liquid when compared with real estate and many debt instruments.
Gold prices also move in tandem with heightened economic policy uncertainty, thereby indicating the safe haven feature of the asset, the RBI said in its latest Monetary Policy Report.
But can the price of the gold crash?
Given the economic uncertainty, gold is expected to touch a new all-time high. In India, prices will also be supported by any further weakness in the Indian rupee. Any sudden sale of gold holdings by central banks to tide over the economic crisis, and crisis in other risk assets prompting investors to compensate their losses through the sale of gold ETFs (exchange-traded funds), are key events that could stall the rise of gold.
For more information visit - https://m.rbi.org.in/Scripts/FAQView.aspx?Id=109
Write-up by: Elesh Gupta
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