At times, gold bonds become cheaper than the yellow metal

The fourth issue of sovereign gold bond 21-22 opened for subscription on Monday. The issue has been priced at ₹4,807 per unit, and there is a discount of ₹50 for those purchasing these bonds online.

The issue price of gold bonds is calculated based on the average price of the precious metal for the last three business days of the week preceding the one in which the issue is made.

The issue price is based on gold of 999 purity as declared by India Bullion And Jewellers Association Ltd. Every issue of gold bond must be listed on the stock exchange within 15 days of the closing of the issue.

Now, if you compare the price of previously listed bonds with the current gold price, you will observe that some of the bonds are trading at a discount, which ranges between 1% and 3%, and could go up or down depending on the demand for gold bonds.

“Sovereign gold bonds of previous issues are trading at a discount in the secondary market because of the downward trend being witnessed in gold prices,” said Sugandha Sachdeva, vice-president, commodity and currency research, Religare Broking Ltd.

“At present, gold prices are almost 14% down from their record highs, marked in early August 2020 amid the overall ‘risk-on’ sentiments in the global as well as domestic markets, which have dimmed the lure of the safe-haven asset,” added Sachdeva.

Buying gold bonds from the secondary market: Buying gold bonds from the secondary market is a good idea as you don’t have to wait for the issue to open and can spread your investments in a staggered manner.

Also, you may get the bond at a discounted price. However, discounts may not be very high.

In case gold prices fall below its issue price, one can buy the bonds at a cheaper rate from the secondary market and keep the average purchase price low.

“Also, the investor gets an option to exit position in small bits, as and when required compared with the lock-in period of five years for redemption applicable for the primary issue,” said Sachdeva.

However, to buy gold bonds from the secondary market, you will need a demat account.

Also, liquidity could be a challenge. You may not be able to buy large quantities if you would want to.

Also, one should be mindful of the taxation while buying and selling gold bonds from the secondary market.

The capital gains on maturity of gold bonds are tax-free, but if you sell the bonds on exchange, the gains will be taxed at the rate of 20% with indexation after three years of holding. Further, if the bonds are sold before three years, the gains will be added to the income of the investor and taxed according to the slab rate he/she falls under.

Gold bonds are considered one of the best ways of investing in gold as apart from capital appreciation, an investor can earn fixed interest at the rate of 2.5% per annum on the amount invested.

Therefore, if you want to invest in gold for the long term, gold bonds are among the best options.