Gold bonds demand dips marginally as equity market rallies

The third tranche of sovereign gold bonds saw people buying 23.88 lakh units worth ₹1,117 crore, as per the data released by the Reserve Bank of India (RBI). The number of units purchased was 6% lower than what was subscribed to in the May issue. The government had sold 25 lakh units of gold bonds worth ₹1,168 crore in the May issue, which saw the highest-ever subscription.

The June issue, which was opened for subscription from 8 June to 12 June, was priced at ₹4,677 per unit (one unit of gold bond is equal to 1 gram of gold). The issue of gold bonds is priced based on the average of the last three working days of the week prior to the week in which subscription opens.

Experts believe that lower subscription could partially be because of the high price of gold as well as the rally in the equity market.

“There are probably two reasons behind this. First, with the equity market doing well, people have started pouring in money in stocks. Secondly, people feel that gold has already run up a lot, hence, it might correct a bit in light of recovery in equity markets locally and globally,” said Chintan Kotak, director, IIFL Securities Ltd.

Gold has rallied around 15 % so far this year. The equity market has made a sharp recovery from the March lows. The S&P BSE Sensex has delivered a return of 32% since the 23 March lows.

However, not all experts agree that the gold rally might stop in the near future. They believe that the demand for gold, which is considered as a safe haven asset, will continue to go up despite the recovery in equity markets. Equity and gold, generally, have a negative co-relation but the trend may reverse this time and we may both asset classes doing well simultaneously, say experts.

“The global scenario is full of uncertainty and the demand for gold will remain intact and may move hand in hand with equity this time,” said Sunilkumar Katke, head, commodities and currencies at Axis securities.

The uncertain environment will provide support to gold prices. “The way central banks across the globe are buying gold, rapidly increasing covid-19 cases, lower interest rates, stimulus packages by central banks increasing inflation and the uncertainty linked with whether the equity rally is sustainable, is keeping the safe-haven demand intact, as the yellow metal has given 15% return this year already, and we expect the prices to touch close to ₹50,000 per 10 grams by the year end,” said Katke.

At present, the gold futures listed on MCX expiring in August is trading around ₹47,300 per 10 grams levels.

As an investor, you should have some allocation towards gold to achieve diversification. But one shouldn’t go overboard in the allocation towards gold and limit it to a maximum of 10%.

Sovereign gold bonds are one of the best options to invest in gold for the long term, as apart from the capital appreciation, the government pays a fixed interest of 2.5% on these bonds.

However, only those investors who want to invest for the long term should invest in these bonds, as they have a lock-in period of eight years. Premature withdrawals are possible after five years. While you may exit early by selling them in the secondary market but liquidity can be an issue. Also, exiting early will attract capital gains tax while they are tax exempt in case a person holds them till maturity. So, if you exit early you will lose the tax benefit.