We will discuss what’s up with sovereign gold bonds. Will the RBI issue it again?

What’s the new’s

Every year, around April and June, RBI comes up with a fresh Sovereign Gold Bonds (SGB) issue. But it has been September and there’s no news of SGB. And the speculation is there would be no fresh issues.

The result? Investors are turning to the secondary market to buy them, increasing their demand and pushing up the prices.

SGB

It is a bond issued by the Reserve Bank of India (RBI), with its price tied to the highest quality gold—999 purity, 24 karats.

Issued and redeemed at the market price of gold, making it an alternative to holding physical gold. Each SGB unit is equivalent to one gram of gold.

To sweeten the deal, SGB also offers an additional 2.5% annual interest on the purchase price.

What makes it best way to invest in gold?

1. Purchase:
No GST, no TDS, and no making charges on purchase.

2. Storage Convenience:
You can store them in a Demat account, just like stocks, or as a physical certificate.

3. Taxes:
No taxes if you hold SGBs till maturity (i.e. 8 years), this is applicable even if you buy it from the secondary market.

Why government might not issue fresh SGBs?

In FY2016-17, the government issued SGB at ₹3119 per unit (representing the gold price per gram). By the redemption date, August 5th of this year, the gold price increased to ₹6938 per gram.

That’s 10.51% compounded annual returns. And let me tell you, it is without accounting for the interest component of 2.5% that SGB holders receive.

Compare it with a normal government bond that pays around 6-8% annual interest, the government ended up paying almost double for SGBs!

Buying SGBs in the secondary market

As of 27th Sept, the price of 1 gram of the highest purity gold, according to the India Bullion and Jewellers Association (IBJA), is ₹7564. However, listed SGBs (1 unit = 1 gram of gold) are trading at prices that are 2.4% to 11.7% higher than the actual gold price!

The SGB with far maturity are carrying higher premiums. Also, the movement across different maturities is not uniform, indicating a lack of volumes.

To conclude

Buying SGBs from secondary markets with premium pricing might not be as fruitful as it is if you buy them when it is issued. You will overpay for it, so your effective return will be lower.

It’s worth comparing SGBs with Gold ETFs, depending on your tax implications and how long you plan to hold them—especially when premiums are on the higher side.