Don't be in a hurry, buy sovereign gold bonds in 2 tranches

Synopsis

The first tranche of sovereign gold bonds is currently open and closes on June 24. Investors will have to pay ₹5,041 per gram of gold after the ₹50 per gram discount for digital payments. This is ₹18 per gram lower than ₹5,059 per gram that they paid for earlier in March this year. Gold prices have gained 7.37% in the last one year in rupee terms, while in dollar terms they are up 4.17%.

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Mehta said that inflationary pressures are however conducive for gold prices.

Mumbai: Investors looking to bet on gold through Sovereign Gold Bonds (SGBs) could spread it over the next two tranches, said financial planners. With uncertainty over the direction of gold prices and interest rates firming up, analysts said investors need not be in a hurry to go overweight on the yellow metal and restrict allocation to 10% of the overall portfolio.

Financial planners said those looking to build this portfolio could split the money between the two issues of sovereign gold bonds in June and August.

The first tranche of sovereign gold bonds is currently open and closes on June 24. Investors will have to pay ₹5,041 per gram of gold after the ₹50 per gram discount for digital payments. This is ₹18 per gram lower than ₹5,059 per gram that they paid for earlier in March this year. Gold prices have gained 7.37% in the last one year in rupee terms, while in dollar terms they are up 4.17%.

Don’t be in a Hurry, Buy Sovereign Gold Bonds in 2 TranchesAgencies

“Cost of acquiring gold increases as interest rates have risen. While war, inflation and high interest rates are supportive for gold, in the near term there is no clear direction on the price,” said Rahul Kalantri, VP (commodities), Mehta Equities.

With inflation in the US at a 40-year high and way above the Federal Reserve’s target of 2%, fund managers see more rate hikes in the offing. Higher interest rates could lead to weakness in gold prices. Over the last couple of months, gold prices have moved down from $1,979 an ounce to $1,848 an ounce.

Gold prices may continue to remain range bound for the next few months as investors gauge the impact of policy on economic growth.

“The yellow metal will have to navigate the trimming of the Federal Reserve’s balance sheet by an anticipated trillion dollars, which is set to begin in June, as this puts upward pressure on interest rates,” said Chirag Mehta, chief investment officer, Quantum Mutual Fund.

Mehta said that inflationary pressures are however conducive for gold prices.

“Continued high inflation, given that much of it is aided by supply side pressures, along with slowing economic growth may result in a stagflation like scenario. This bodes well for gold prices,” said Mehta.

Sovereign gold bonds are one of the most efficient ways to own gold for investors not requiring intermittent liquidity, said Vineet Nanda, founder, SIFT Capital.

“Gold prices in dollar terms have been stagnant over the last decade and most of the returns for Indian investors have come only through rupee depreciation. Given this long period of underperformance, investors with eight-year horizon could accumulate the yellow metal through sovereign gold bonds“, said Nanda.

These bonds pay an interest of 2.50% per annum, an added benefit to the investors. Investors do not have to pay making charges for physical gold or expense ratio of 50-100 basis points they pay for holding gold ETFs every year. Also, there is no capital gains tax payable if the sovereign gold bonds are held till maturity, while ETFs held for more than three years attract capital gains tax (with indexation benefits).

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