Sovereign Gold Bond scheme opens today. Should you subscribe?

The last tranche – twelfth in the series – of Sovereign Gold Bond (SGB) for financial year 2020-21 (FY21) opened for subscription on Monday. Priced at Rs 4,662/gram, investors applying online will be eligible for a discount of Rs 50/gram. The tenor of the bond is 8 years and with a fixed interest of 2.50 per annum, which will be credited semi-annually in the investor’s bank account.

With gold prices on a decline, thanks to a rise in bond yields – globally and in India – analysts say investing in the yellow metal and the SGB scheme makes little sense right now. In the short-to-medium term, treasury yield, dollar movement, and the pace of economic recovery worldwide will guide prices of the yellow metal.

“Gold will underperform in the short-to-medium term as the bond yields are rising. Investors will be better off looking at other investment avenues other than the yellow metal right now. On the contrary, there are good investment options / themes available in the equity markets given the economic recovery. That said, the long-term prospects of gold still remain intact,” says G Chokkalingam, founder and chief investment officer at Equinomics Research.

Gold prices have been on a downward spiral since the past few weeks, hitting an eight-month low recently on rising US Treasury yield, appreciating dollar, and global economic recovery. In the last 30 days alone, the prices have dropped nearly 6.3 per cent. As a result, the prices of the SGB issue have also been adjusted accordingly. The previous gold bonds, which were available for subscription from February 1 to February 5, 2021, for instance, had an issue price of Rs 4,912 per gram of gold – around 5 per cent higher than the current issue that closes March 5.

The demand for the yellow metal, too, has been hit. Gold demand in India in calendar year 2020 (CY20) hit a 25-year low of 446 tonnes as compared to 690.4 tonnes in 2019, World Gold Council (WGC) data show. The last time the demand hit such a trough was in 1995 at 462 tonnes. Total jewellery demand, too, slipped 42 per cent at 315.9 tonnes in CY20 as compared to 544.6 tonnes in 2019.

“India’s gold demand dropped by over a third in 2020 on the back of Covid-induced lockdowns and lifetime high prices. However, the drop was significantly lower when viewed in value terms, 14 per cent lower than 2019 as prices were up 34 per cent hovering around Rs 50,000/10grams for most past of the year," says Somasundaram PR, managing director for India, World Gold Council.

Opening of physical gold markets after the lockdown, analysts say, has been another factor that has dampened demand for SGBs. Sales in August 2020 at 6.35 tonnes were the highest ever in a month since the launch of SGBs in 2015. From a long-term horizon though, analysts still suggest that gold remains a safe-haven asset and investors should allocate a portion of their investible surplus in the yellow metal.

“Investment in paper gold is the best and the most effective way of investing in the yellow metal. Gold should have an allocation of 5-20 per cent of any portfolio depending on the risk appetite,” suggests Nish Bhatt, founder & chief executive officer at Millwood Kane International, an investment consulting firm.