Sovereign Gold Bond opens as yellow metal price hits 8-month low: Should you subscribe?

The twelfth tranche of Sovereign Gold Bond Scheme (SGB) opens for subscription on Monday, March 1 till Friday, March 5 as the yellow metal hits eight-month record low price of around Rs 46,000. Gold price is down by over Rs 11,000 from its highs of Rs 57,000 in August 2020. The COVID-19 pandemic and lockdowns had led to a surge in gold prices globally. Most commodity experts see a further downside in the gold prices amid decrease in infections, opening up of economies, and increase in vaccination pace. So, does it make sense to invest in the Sovereign Gold Bold now?

"Gold tumbled 3% to an eight-month low on Friday en route to its worst month since November 2016. Prices have been falling gradually in the last few weeks as brighter economic outlook and inflation fears propped up US Treasury yields, eroding bullion's safe-haven status. Therefore, we expect gold prices to remain weak towards Rs 45,200 level in the short-term," says Raj Deepak  Singh, Research Analyst, ICICI Securities.

However, according to investment experts, the weak gold prices in the near term should not act as a dampener for those looking to invest in gold for a long term to diversify their portfolio.

"SGB is the only gold investment which offers interest at 2.5% over the price appreciation. The fundamental idea of investing in gold is to achieve portfolio diversification. Ideally, investors like to keep five to 10 per cent of their portfolio allocation in gold. For them timing the market does not make sense," says Joydeep Sen, Trainer, Author, Columnist, wiseinvestor.in .

The gold bonds are issued by the Reserve Bank of India, on behalf of the Government of India. Interest on SGB will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

An individual subscriber in SGBs is allowed to buy a maximum limit of four kgs in a year. The current issue of Sovereign Gold Bond has been priced at Rs 4,662 per gram of gold. Online investors who make the payment against the application through digital mode will be eligible for a discount of Rs 50 per gram of gold. For such investors, the issue price of Gold Bond will come down to Rs 4,612 per gram of gold. SGB has a tenure of eight years. However, early encashment/redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates.

"Investment in paper gold is the best and the most effective way of investing in yellow metal. Gold should have an allocation of 5-20% of any portfolio depending on the risk appetit," says Nish Bhatt, Founder & CEO, Millwood Kane International.

Risk of investing in SGB

SGB suffers from an inherent risk of capital loss if the market price of gold declines. In this case, if an investor holds a strong perception that the gold prices will fall in the long term, then there is no case of investing in SGB.

"If an investor is of the view that there will be no appreciation in the price of gold during the eight-year tenure of the SGB issue, then there is no point in investing in gold," says Sen.

"Moving forward, treasury yield, dollar movement, and the pace of economic recovery worldwide will guide gold price," says Bhatt.

Also read: Gold prices hit eight-month low - Should you invest now?