Why sovereign gold bonds could be a better bet than physical metal

Safety first, glory if possible. Savers sticking to this investment theme would rather choose gold over competing assets now, with economic prospects in various parts of the globe turning increasingly uncertain.

In this backdrop, sovereign gold bonds offer a great proxy play to physical gold, the prices of which have hit a record lately. Series VIII of these bonds are open for subscription until January 17.

These bonds are available at Rs 3,966 per gram for digital payments, while investors using the physical mode of payments will have to pay Rs 4,016 per gram.

“Central banks continue to buy gold, geopolitical tensions continue between Iran and the US, while there is no immediate solution to the trade war between the US and China,” said Kishor Narne, associate director, Motilal Oswal Financial.

Gold prices could move up another 5 per cent this calendar year, he said.

Prices have climbed 22 per cent in the past one year, with the precious metal among the best performing assets. In the same period, the Sensex gained 16.25 per cent, while investments in a liquid fund earned 6.27 per cent. Over three and five years, the yellow metal gained 10.05 per cent and 6.73 per cent, respectively.

Wealth managers believe investors should allocate 5-10 per cent of their portfolio funds to gold as it acts as an insurance against global uncertainty and rupee depreciation. Gold also helps in portfolio diversification due to its low correlation with other asset classes, such as equity and fixed income.


Sovereign gold bonds score on the taxation front as they do not attract capital gains tax if held until maturity. By contrast, equities attract 10 per cent long-term capital gains tax, while longterm capital gains on debt funds are taxed at 20 per cent with indexation.

“Investors get an additional 2.5 per cent interest every year, there is no cost of storage or expense ratio, and it is tax efficient,” said Abhishek Singhvi, founder, Trufid, Investment Advisors.

Sovereign gold bonds also score over exchange traded funds (ETFs) and physical gold as there is neither any expense cost, nor storage related challenges.

Sovereign gold bonds have a tenor of eight years, with investors having the option to exit after the fifth year on interest payment dates. The redemption price will be the simple average of the closing price of gold on the previous three days. In addition, they are traded on the stock exchange with investors having the option to sell, though liquidity is low.