Ahead of the festival season, the government today launched the Sovereign Gold Bond (SGB) Scheme 2018-19. The bonds will be issued every month till February in five tranches. The minimum subscription denomination will be one gram and the maximum will be 4 kg for an individual and Hindu Undivided Family and 20 kg for trusts and similar entities in a financial year.
The annual ceiling will include bonds subscribed under different tranches during initial issuance by the government and those purchased from the secondary market. The bonds will be sold through banks, Stock Holding Corporation of India Ltd, designated post offices, and recognised stock exchanges. The tenor of the bond will be for a period of eight years with exit option in the fifth, sixth and seventh year to be exercised on the interest payment year.
Gold outlook
Returns from gold has been lacklustre this year. In September, gold prices declined by nearly 1% taking the year-to-date losses to nearly 9%. Global macro factors like US-China trade wars, Brexit uncertainty, and Italian crisis has led to the fall in the prices of the precious metal. Last time when gold had such consecutive monthly losses was in 1997. Factors such as rising interest rates in the US, a strong dollar and a hawkish Fed are the perfect recipe for gold’s dire state.
Chirag Mehta, senior fund manager, Quantum AMC, says as long as the bond bubble kept inflating, it was able to mask the huge imbalances built up in debt and asset values. But, it no longer will be sustainable given that central banks are now forced to run a tighter monetary policy. “The world continues to remain in a state of great disequilibrium, both with respect to the global economy and geopolitics as well. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby help you to reduce overall portfolio risk,” he says.
Dwindling interest for gold
India’s overall gold demand (jewellery, bars and coins) was down in Q2 2018 to 187 tonnes from 203 tonnes during the same quarter last year. However, the y-o-y drop in demand was magnified by the jump in demand seen in Q2 last year when consumers rushed to make gold purchases before GST was implemented on July 1. Jewellery demand was 1% below the five-year quarterly average of 149. Demand was boosted in April by Akshaya Tritiya and the wedding season, before fizzling out.
Typically, India’s gold demand rises during the festival season followed by wedding-related purchases. The tranches of the SGB scheme are timed to lure some from physical gold to paper gold. This may help reduce India’s gold imports which were pegged at $33.7 billion in FY18. As a result, the current account deficit had widened to a four-quarter-high at 2.4% of gross domestic product (GDP) in the April-June period on the back of rising crude oil prices, from 1.9% of GDP in the January-March quarter of 2017-18.
Bond features
The bonds are available in both demat and paper form and can be used as collateral for loans. Investors get a fixed rate of 2.5% as interest per annum, which is payable semi-annually on the nominal value. The price of the bond is fixed on the basis of simple average of closing price of gold for the last three working days of the week preceding the subscription period. The issue price of the bonds will be Rs 50 per gram less for those who subscribe online and pay through digital mode.
Payment for the bonds will be through cash (up to `20,000) or demand draft, cheque or electronic banking. The redemption price will be based on simple average of last three days of closing price of gold.
The bonds can be used as collateral for loans and the loan-to-value ratio will be set as per the rules of Reserve Bank of India. The interest on gold bonds will be taxable. However, the capital gains tax arising on redemption of the bonds has been exempted by the government.
While most Indians prefer to invest in the precious metal in the physical form, gold exchange traded funds (ETFs) of mutual funds are also a convenient way to invest in the precious metal. However, gold bonds are a better way to invest in the metal as the investment will earn an interest. Gold bonds also score over ETFs as there are no fund management charges.
Source: financialexpress.com