Take a staggered approach to buy sovereign gold bonds

• The Indian government released its second tranche of sovereign gold bonds at a price of ₹5,873/gm with 8 year tenure.
• The tranche opened on September 11 and will close on September 15.
• Gold prices are expected to remain range-bound in the near term, but a hazy macroeconomic picture offers tailwinds for growth, say analysts.
• Investors must buy on dips to accumulate the risk-reducing role in uncertain times, analysts say

Gold prices have been rising for most of 2023 with a few dips since March. As the yellow metal’s value oscillated between increased risk aversion and higher opportunity cost of holding gold and US economic resilience — experts advise investors to remain strong on gold and buy on dips.

The Indian government has released its second tranche of 2023’s sovereign gold bonds at a price of ₹5,873 per gram (effective after ₹50 digital payment discount) with an eight year tenure. For those intending to go long on gold, this is a good opportunity, say analysts, as Monday’s prices hovered at around ₹60,000 per 10 gms.

“These bonds offer annual returns of 2.5%, which serve to balance their portfolio over time. However, investors are encouraged to adopt a staggered approach when acquiring sovereign bonds. By doing so, they can accumulate gold at varying price points,” Jateen Trivedi, VP of research at LKP Securities told Business Insider India.

While the government assures the holding of the grammage in gold, its returns depend upon the prevailing gold price of time. On redemption, capital gains are not charged on these bonds to the investor — irrespective of the quantum of gains earned by the investor.

If the bonds are sold in the secondary market, they will either be charged short-term or long-term capital gains tax as per the time sold. “Retail investors considering taxation benefits may consider sovereign bonds in place of Gold ETFs. Meanwhile both options are favorable as compared to investment in physical gold in terms of lower capital investment and taxation purpose,” said Naveen Mathur, director of commodities & currencies, Anand Rathi Shares and Stock Brokers.

The tranche opened on September 11 and will close on September 15.

Range-bound in the near term

International gold prices have been on a backfoot for most of August. But they had had a headwind in the form of US 10-year inflation-protected treasuries which touched 2% for the first time since the 2008 financial crisis starting the month at 1.6%, said Quantum Mutual Fund in its September outlook.

“Long term US treasury yields declined on comments from a host of Federal Reserve officials. They signalled a pause in the central bank rate hike cycle,” said a report by ICICI Securities. As interest rates harden, gold prices will rise as a safety bet, and if they remain steady or rate cuts come into the picture, they would fall.

In the near term, analysts believe that multiple macroeconomic factors might keep a lid on prices and remain rangebound for the foreseeable future till clarity emerges on the global growth and inflation fronts.

“Investors can use a buy on dips strategy to build a 15-20% allocation to gold which can play a risk-reducing role during the current macroeconomic and geopolitical uncertainty as well as enhance returns in case of a growth setback where the Fed is forced to cut rates even while inflation is high,” said Ghazal Jain, fund manager of alternative investments, Quantum Mutual Fund.

With or without interest rate movements, the US economy has been on a hard path as pandemic era savings are dwindling and rising credit card debt. Gold’s shine remains high as a safe bet as few analysts have chosen to change their annual outlook on gold prices.