Why sovereign gold bonds are now an attractive bullion bet — explained

Sovereign gold bond scheme: Gold rate today is in uptrend after attaining uptrend in November 2022 on US inflation concerns and less hawkish US Fed in rate hike. Gold prices are up 13% in the last four months, both globally as well as in India). Domestically, it is up 28 per cent in the last two years (13 per cent CAGR) and 78 per cent in the last four years (15.5 per cent CAGR). The historical long term return of Indian gold is around 10 per cent per annum. Recent return in gold is higher than long term average and, therefore, mean reversion may lead to moderation (lower than long term average return of 10 per cent per annum) in return in the near term. While bullion experts are advising gold investors to continue buying on dips as outlook for gold is still positive, ICICI direct believes that Sovereign Gold Bonds (SGBs) are the best way to take exposure in the precious yellow metal.

Why SGBs are superior than simple gold?

Batting in favour of sovereign gold bonds, ICICI direct said, "Sovereign gold bonds (SGBs) remain the best way to take exposure to gold due to additional 2.5% per annum interest and no capital gains tax. There are no annual recurring expenses while capital gains arising on redemption of the sovereign gold bond scheme would be exempt from tax. If these bonds are sold in the secondary market before maturity, capital gains arising on such transaction will taxed @ 20% with indexation if sold on or after three years and would be subject to marginal tax rate if sold before three years."

Advising gold investors to invest online on SGBs, the brokerage said, "The discount of ₹50/gram will be available for investors applying online and making payment using digital modes. Investors will get additional interest at the rate of 2.50% per annum on the nominal amount. They will continue to have full exposure to gold prices to the extent of amount deposited."

So far, the Government of India through Reserve Bank of India (RBI) has issued 62 tranches and raised around ₹43000 crore. The popularity of Sovereign Gold Bond has gained significance prominence in last few years as investors gained confidence on the ease of investing and additional interest which SGBs offer.

Gold price outlook

On why gold price rally may continue, the brokerage said, "The US dollar as well as US bond yields have begun to cool off, which has been supporting gold. Buying by global central banks and the potential positive impact on gold demand given the opening up of Chinese markets have also boosted prices."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.