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Monday, August 10, 2020

Explained: You have till tomorrow to invest in gold bonds, but should you?

There are several questions involved: Why are gold prices rising? Is it a good idea to buy at this price? Can the price crash?

Written by Sunny Verma , Sandeep Singh , Edited by Explained Desk | New Delhi | Updated: July 9, 2020 5:23:13 pm
Gold bonds, sovereign gold bonds 2020-21, should you invest in gold bonds, gold rate, gold price, gold market value, gold covid value Gold bonds have a maturity period of eight years, but investors have the option to exit after the fifth year. (Getty Images)

The fourth tranche of sovereign gold bonds 2020-21 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 price of gold has been rising relentlessly over the past year. The yellow metal had reached Rs 49,352 per 10 g on Monday afternoon at the Delhi bullion market.

As it trades at all-time-high levels amid the Covid-19 pandemic, big returns over the past year have drawn a flood of investors in gold – at the same time, there are concerns over the high price point, and whether the time is right to invest in gold.

What are the benefits of buying gold bonds?

Gold bonds offer investors twin benefits of price appreciation along with a fixed 2.5 per cent coupon per year. Interest earned on these gold bonds is added to the holders’ income, and taxed according to their slab rate.

The government introduced the gold bonds scheme in 2015 to wean away investors from the physical gold market. Funds raised through such issuances form part of the government’s overall borrowings in a year. Any capital gains on these bonds at maturity is tax free, making them far more attractive than owning physical gold.

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. Over the last one year, gold prices in Delhi have gone up by over 43 per cent from Rs 34,380 per 10 g to Rs 49,350 now. Since the beginning of March 2020, when the coronavirus epidemic began in India, gold prices have risen by 16 per cent.

In the international market, the price is up by around 27 per cent, and gold is currently trading around $1,775 (approximately Rs 1.32 lakh) per ounce (about 28.35 g).

Since India mostly imports gold, the depreciation of the rupee vis-à-vis the dollar makes gold costlier in India. Domestic factors such as concerns over the country’s fiscal health and a higher demand for the precious metal also pushes up prices.

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But why are gold prices rising?

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.

The nearly 40 per cent crash in benchmark equity indices in the US between February and March 2020 forced the US Federal Reserve to announce a record liquidity injection and bond buying programme of more than $3 trillion.

In India, the RBI has cut policy rates by 115 basis points over the last three months, and brought down the repo rate —at which it lends to commercial banks— to 4 per cent. It has also announced liquidity injection in the economy – and any expansion in the paper currency tends to push up gold prices. Traditionally known as an asset class that preserves its value, the demand for gold has been going up in line with rising uncertainty.

Gold bonds, sovereign gold bonds 2020-21, should you invest in gold bonds, gold rate, gold price, gold market value, gold covid value 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. (Express Photo)

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.

After any major economic crash and recession, gold prices continue their upward run. Analysts of the market feel that gold could now overtake its previous peak of around $1,900 per ounce in the global market.

CJ George, MD, Geojit Securities said: “Given that there is no medical solution in sight for Covid-19, the current rally in gold is likely to continue. In India people are also looking at it as a hedge against rupee depreciation. Central banks and large investors are accumulating gold too.”

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.

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After the collapse of Lehman Brothers in September 2008 in the US, which led to a worldwide economic crisis, gold prices jumped from around $700 an ounce in October 2008 to peak at $1,900 an ounce in September 2011. Over the next four years, gold declined steadily – and crashed to almost $1,000 an ounce in December 2015.

Should you invest in gold at the current price point?

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.

But can the price of 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 sale of gold ETFs (exchange traded funds), are key events that could stall the rise of gold.

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