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Sovereign Gold Bonds (SGBs): All you need to know6 min read

December 19, 2022
Sovereign Gold Bonds All you need to know

Sovereign Gold Bonds (SGBs): All you need to know6 min read

RBI has just closed the third tranche of SGB for FY22 on 23rd December 2022. The issue price of the bond had been fixed at ₹5,409 per gram. As usual, there was a discount of ₹ 50 per gram for those who invest online1.

You might be curious to understand more about SGBs, and is it really for you or not, but before that, here’s some context. SGBs are a very unique instrument in their genesis, and its utility, for you, and for the country. 

Indians, as you’d know are crazy about Gold. India is the world’s second biggest consumer of Gold. You might’ve read a lot of articles on surging Gold imports. A few samples below

India spends record $55.7 billion on gold imports in 2021: Govt source
Why Gold imports into India almost tripled last month

But as always, the story is a bit more nuanced. Yes, India is a big importer of Gold, but India is also a big exporter of gold and jewelry. 

In FY 22, India imported $81 Billion worth of precious metals, gems, pearls and other forms of jewelry making it the second largest item in our import basket. At the same time, we also exported $39 Billion worth of precious metals, gems and other forms of jewelry2. So while we do import a lot of Gold, a large portion of it is for value addition by our skilled craftsmen, and is exported as jewelry. 

(P.S. The same is true for Crude oil too. Yes it is a fact that we have negligible domestic production of crude oil, but anytime someone throws a number that we import a big number of dollars worth of crude, tell them that a fairly large portion of that is exported. Oil is our largest import item, and also, the largest export item).

Back to Gold. While we do export a lot of the gold that we import, our domestic demand for Gold is very high. And while Gold has its use in the manufacturing industry, most of the gold we consume is in the form of jewelry, and the multiplier effect it has on our economic growth, and productivity is marginal. 

One detrimental effect such a large import of Gold has is on our Current Account Deficit, or CAD. CAD is the difference between our exports and imports. If it is a deficit, it means we are importing more from the world, than we are exporting. In FY23, our CAD is expected to be $110 Billion, or about 3.3% of our GDP3

While a CAD per se isn’t bad for the economy (USA has a CAD of ~3.6% of GDP), a large CAD puts pressure on our currency and our Forex reserves (Unlike USA, where the world has an insatiable demand for USD, the strength of Rupee depends on how our economy is doing, and our CAD, among other factors) . And to have the CAD driven by a not so productive asset like Gold is a big cause of concern for the economy. 

So the Government and the RBI came up with an intelligent plan to reduce our import of Gold. They came up with an instrument called the Sovereign Gold Bond (SGB). 

What Is Sovereign Gold Bond (SGB)?

SGBs are innovative instruments issued by the Government (so your investment is guaranteed by the Government), which give you the returns of Gold (Yes, the same.. If gold prices go up, SGB prices will go up, and if gold goes down, SGB prices will go down), and an additional interest of 2.5%. Not just that, SGBs are listed on the stock exchanges, so you can buy/sell them anytime you want. The Govt also provides some tax benefits vis-a-vis physical gold (more on that later).  

SGBs are innovative in that they give the returns of Gold, without the country having to physically import the Gold, thus improving our CAD and helping our currency. 

Why SGBs?

So why should you consider Gold, and Gold via the SGB route? Before we compare SGBs with other ways of getting Gold (Gold ETFs, physical gold), let’s understand why Gold is a very important part of your asset allocation. 

You would’ve read a lot of articles on the returns of Gold against Nifty, and statistical concepts like correlation thrown about. So here is a table showing the returns of Gold against Nifty.

table 1

Nifty returns are Nifty Price returns (www.niftyindices.com)

Gold returns are returns of Nippon Gold ETF, on NSE

But the real reason you should invest in Gold is not the returns, but the benefit of diversification. We have all heard about the benefits of diversification, but let’s make it tangible for you. The reason you should invest in Gold is the benefit it provides to your portfolio during bad times. 

On a 12 month basis, whenever Nifty is negative (which, like it or not, has happened once every 4 years), Gold gives you positive returns of 22%! So what this means is that when your equity portfolio is going through its toughest times, Gold cushions your portfolio. 

Let’s go through a few instances. 

Nifty returns are Nifty Price returns (www.niftyindices.com)

Gold returns are returns of Nippon Gold ETF, on NSE

You can clearly see the benefit of Gold during tough times. 

Now that you have a better understanding of the utility of Gold in your portfolio, let’s see the ways in which you can invest in Gold, and which is the right approach for you.

So there are 3 main ways in which you could invest in Gold

  • Physical Gold – The physical route
  • Gold ETFs and Funds – The MF route
  • SGBs – The good for country route 😉

Why do we call SGBs good for the country? SGBs are the only way you get the returns of Gold, without the country having to physically import Gold. Physical Gold, obviously, has to be imported, and Gold ETFs and funds are also backed by an equivalent amount of Gold.

And sone pe suhaga, SGBs give you additional returns of 2.5% over Gold. So not only are you helping out your country, you are getting paid for it too! Now that’s what we call a win-win.

Just to understand the differences between these instruments, here is a handy table

table 3

Bottom Line

The next tranche of SGBs ieSovereign Gold Bonds (SGBs) 2022-23-Series IV will be open for subscription from 6th – 10th March 2023, watch out for it!

So should you go for SGBs? Well if you have a short term view on prices of Gold, Gold ETFs/funds might suit your purpose as they are a lot more liquid. But if your investment horizon is anything more than a year, SGBs are a better option. They give you an additional income of 2.5%, and if held till maturity, your capital gains are tax exempt. 


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References:

  1. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54871
  2. https://tradestat.commerce.gov.in/eidb/default.asp
  3. https://www.business-standard.com/article/economy-policy/india-s-cad-deficit-pegged-at-3-3-2-of-gdp-in-fy23-cea-nageswaran-122112401266_1.html