Sovereign gold bond issue to open tomorrow: Should you subscribe?

NEW DELHI: The ninth tranche of the sovereign gold bond (SGB) scheme 2021-22 will open for subscription on Monday. This issue comes amid increased demand for bullion given heightened market risks.

Investors can bid for a minimum of 1 gm of gold at Rs 4,786 against Rs 4,791 per gram for the previous tranche. There will be a Rs 50 discount for those bidding online. The issue closes on Friday, January 14.

Investment in sovereign gold bonds has picked up pace in recent months. However, lack of clarity on how gold will move in the coming month may keep investors cautious. If prices drop, it may be better to subscribe in later tranches.

“Currently, gold prices are trading near a 2-month low. Gold prices are almost Rs 9,000 per 10 gram down from their peak witnessed in 2020. The weakness is mainly due to the minutes of the US Fed that indicated a faster rate hike and also a reduction in bond buying than earlier estimated,” said Nish Bhatt, Founder & CEO, Millwood Kane International, which is an investment consulting firm.

“Going forward, the pace at which the global central banks will unwind their monetary position, movement of the US dollar will guide gold prices in the year 2022.”

In case you wish to subscribe, you can do so via your bank. Besides, these bonds are also sold through Stock Holding Corporation of India Limited (SHCIL), designated post offices, National Stock Exchange of India and BSE, either directly or through agents.

Investors would get a 2.50 per cent interest on the amount of initial investment, which will take effect from the date of its issue and will be payable every six months. Besides, they can also see capital gains at the time of redemption, in case the price of gold at the time of redemption is higher.

According to the Indian Bullion and Jewellers Association, the highest purity gold traded at Rs 47,583 per 10 gram on Friday evening. The price data released by the association forms the basis for prices of SGBs.

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bonds are issued by RBI on behalf of the government.

SGB is a favoured route for the government to convert all gold investments into a digital mode. It will help keep the deficit under control, and provide support to the currency.

The tenor of the bond will be for a period of eight years with exit options in 5th, 6th and 7th years, to be exercised on interest payment dates. Besides, bonds will be tradable on stock exchanges within a fortnight of the issuance. Though the liquidity is usually low on exchanges.

Among benefits of subscribing to SGB is attractive interest with asset appreciation opportunity, redemption being linked to gold price, elimination of risk and cost of storage, exemption from capital gains tax if held till maturity and a hassle free holding as it eliminates the storage cost of physical gold.