Gold Sovereign Bonds: Buy Gold as an Inflation Hedge, Not for Tactical Play

Respect the fundamentals and allocate 10 to 15% of your portfolio to this strategic asset class. Avoid lump sum investments at current levels.

The ongoing Russian-Ukrainian war pushed gold prices to a 13-month high in the global market at $1,908 an ounce on Feb. 23, and domestic prices hit 52,228 rupees for 10 grams at the MCX spot, indicating the yellow metal. call as a safe haven in times of crisis. With equity and crypto markets remaining volatile and vulnerable to geopolitical developments, the metal will benefit as risk-averse investors increase their exposure amid pullbacks in riskier assets.

The government has also launched the Sovereign Gold Bond (SGB) Scheme 2021-22 – Series X, which will be open for subscription until March 4. The Reserve Bank of India has set the price at Rs 5,109 per gram of gold. Investors who apply and pay online will receive a rebate of Rs 50 per gram.

However, gold exited the highs as risk sentiment stabilized after market participants assessed the impact of sanctions imposed by the United States and other Western countries on Russia. Experts say that once the uncertainty subsides, gold prices would tend to decline as they have in the past. On the domestic market, gold prices have risen 8.5% since January of this year. So, should individuals invest in gold to diversify their portfolio and hedge against inflation?

Risk reduction role

Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, said that while the Russian-Ukrainian conflict will be in the headlines for some time now, investors should remember that gold is not a game. tactical. “You have to stick to the fundamentals and allocate 10-15% of your portfolio to this strategic asset class which has repeatedly played a role in enhancing returns and reducing risk in investors’ portfolios in times of crisis. financial, geopolitical or other crisis. Those already invested should therefore stay put. New investors should avoid lump sum investments at current levels,” he says.

what to buy

Although most Indians prefer to buy gold jewelery – data from the World Gold Council shows that gold demand for jewelery increased by 93% to 610.9 tonnes in 2021 from 315.9 tonnes in 2020 – this is not the same as investing in gold because physical gold is locked into pricing inefficiencies through markups and fees that affect returns. Then, you have to be particular about the purity and the hallmark, in addition to the cost of storage as in the rental of lockers.

Investments in gold should be made in financial form – gold sovereign bonds and gold exchange-traded funds (ETFs). While digital gold sold through non-brokeraged wallets or platforms meets liquidity criteria, it fails regulation and pricing efficiency due to high bid-ask spreads.

Gold Sovereign Bonds

An investor can buy SGBs digitally through the websites of regular commercial banks, bank branches, designated post offices, National Stock Exchange and Bombay Stock Exchange. Although SGBs pay an annual interest rate of 2.5% payable semi-annually and are tax efficient as there is no capital gains tax if held to maturity, they suffer from the low liquidity of the secondary market, which leads to price inefficiencies. An investor will have to hold the bonds for eight years and will have an exit option from the fifth year that can be exercised on interest payment days.

Gold ETFs

Gold ETFs sold by mutual funds are backed by physical 24-karat gold and investors don’t have to worry about purity or storage. These are open-ended funds and are traded on an exchange at the prevailing market price of physical gold. One can buy a gold ETF by investing an amount as low as Rs 50 and the trade can be executed at any time during trading hours. Returns are benchmarked to actual physical gold returns, subject to tracking error. There are no deductions except for the exit charge for a particular holding period.

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