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The reason for higher subscription is due to the increased investment demand for the yellow metal. (Photo:iStock)
The reason for higher subscription is due to the increased investment demand for the yellow metal. (Photo:iStock)

May issue of sovereign gold bonds sees highest-ever subscription

  • Before the May issue, the highest amount mobilized stood at 1,082 crore from the October 2016 issue.
  • In the April 2020 issue, investors subscribed to 17.73 lakh units of gold bonds worth 822 crore.

The government sold 25 lakh units of gold bonds worth 1,168 crore in the May issue, as per the data released by the Reserve Bank of India (RBI). This is the highest-ever amount mobilized by the government from the sale of sovereign gold bonds. The issue opened for subscription on 11 May and closed on 15 May. The issue was priced at 4,590 per unit (one unit of gold bond is equal to one gram of gold).

There have been 39 issues of gold bonds so far. Before the May issue, the highest amount mobilized stood at 1,082 crore from the October 2016 issue in which the government sold 35.98 lakh units. In the April 2020 issue (first tranche of gold bonds for FY21), investors subscribed to 17.73 lakh units of gold bonds worth 822 crore.

The reason for higher subscription is due to the increased investment demand for the yellow metal, which is considered as a safe haven asset during the turbulent times. Gold has delivered a return of around 40% in the past one year. As per the World Gold Council report, Q1 of 2020 has seen robust investment demand. “Total investment demand for gold increased by 80% year-on-year to 539.6 tonnes," said the report.

There is a lot of uncertainty with regard to the economic impact of the covid-19 pandemic. Institutions such as The International Monetary Fund (IMF) , The Organisation for Economic Co-operation and Development (OECD), Moody’s and the World Bank have downgraded their global growth forecasts sharply.

“Considering the sharp increase in gold prices and fear surrounding other assets, resulting in gold becoming the asset of choice as a safe haven, there has been a lot of interest in gold recently," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

Prices of gold have once again crossed a high of 47,000 per 10 grams. The near-term outlook for the commodity is positive. “We expect that prices over the next 12 months could be headed higher. We expect a target of around 54,000," said Navneet Damani, vice president—research, currency and commodities, Motilal Oswal Financial Services Ltd.

Gold bonds are considered as one of the best alternatives of investing in the yellow metal for the long term, as they not only benefit from the appreciation in the prices, but an investor can also earn a guaranteed fixed interest of 2.5% on the investment amount.

If you are planning to invest in gold for the long term, gold bonds are one of the best alternatives available, but remember that these bonds have a tenure of eight years with premature withdrawals available only from fifth year onwards. Although these bonds are listed on the exchanges, the liquidity is generally poor. Therefore, exiting them before maturity can be difficult.

Also, don’t go overboard with your allocation in gold and invest in line with your asset allocation. “Investors need to be careful to ensure that gold does not form more than 10% of their overall portfolio," said Dhawan.

Meanwhile, RBI has issued the calendar for the upcoming sovereign gold bonds. The next issue will open for subscription on 8 June.

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