Sovereign Gold Bond Tranche 6 - Review

Published on Saturday, August 29, 2020 by Chittorgarh.com Team

Sovereign Gold Bond (SGB) is government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of the Government of India.

For those who are looking for investment in gold, sovereign gold bonds are considered one of the best options as investors can not only gain from the appreciation in prices of the precious metal but also earn interest at the rate of 2.5% on the initial investment amount during the entire tenure.

Having successfully launched five tranches so far, we have the Tranche VI of SGB that opens for subscription on August 31, 2020 and will close on September 04, 2020. SGB-VI is being issued Rs 5117 per gram. Allotment of SGB-VI I scheduled for September 08, 2020. Investors applying online will get a discount of Rs 50 per gram, thus the effective cost will be Rs 5067 per gram. An Individual investor can bid for a minimum of 1 gram and in multiples thereon, thereafter. The maximum limit of subscription shall be 4 kgs for individuals and HUFs. Trusts and other similar entities can bid up to a maximum of 20 kgs.

Post allotment, SGB-VI will be listed on BSE and NSE. This offering comes at a time when gold prices have marked huge volatility with crossing historic high of around Rs 5900 per gram and currently hovering around Rs 4800 per gram.

The tenor of the gold bonds is eight years with an exit option after the fifth year. The redemption price is based on the then prevailing price of gold - a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited. One can sell these bonds before 5 years on the exchanges in case of need of funds. For this demat holding is compulsory. While this offer carries an annual interest rate of 2.50% to investoRs Capital gains, if any, at maturity is tax-free. This is an exclusive benefit available on gold bonds.

Having gold in one's portfolio will help in diversifying risks, particularly if one has a long-term the investment horizon. But at the same time, one should not allocate more than 5-10% of the total portfolio in gold. And if investment is what one is interested in, owning gold in paper form will serve a purpose in the most cost-effective way.

As per reports recent SGB-V offer created history with a record subscription worth Rs 3387 cr. This was attributed to the higher prevalent Gold prices during the subscription period of this offer. However, post listing, Gold prices have tumbled and this offer is currently quoting at a discount to offer price. Considering lower ongoing Gold prices result in lackluster response for this offer. Yes, the only main benefit is the investment bears a 2.5% coupon rate.

For the current calendar year Gold has marked a high of Rs 59300 per 10 gram and its latest quote for 24K purity are Rs 52340 per 10 grams.

The below chart represents the historical movement of gold prices in India:

(ANZ's just-released report `East to El Dorado: Asia and the Future of Gold' says the price of gold could exceed $2,400 per ounce by 2030, more than double its current value of around $1,150.

Gold which has already rallied 75% in the last one and a half year may jump another 76% in the next 18 months, say analysts. Bank of America Securities (BofA Sec) believes that gold prices in the international market may rise to $3000 per ounce (Oz) by the end of 2021. The brokerage upped its target price on gold from $2,000 to $3,000.

'As central banks and governments double their balance sheets and fiscal deficits respectively, we have also decided to up our 18-month gold target from $2,000 to $3,000' BofA Sec mentioned in a note.

In rupee terms, $3,000 per ounce means Rs 82,000 per 10 grams, an upside potential of 76% in the next 18 months. On Thursday, gold futures for June on MCX closed at Rs 46,352/10gm. In the international market, gold is currently trading at about $1,750 level.

Analysts say as stocks and bonds do not show much optimism as an investment option in the current scenario, gold could be the asset to put your money in)

Conclusion

Cash surplus investors may consider investing in this offer with a long term perspective as Gold analysts are hinting at Rs 8000 per gram in a year or two.