Gold is a favorite asset class among investors. But its subdued performance during the last seven years was a dampener on investor enthusiasm. It returned a meagre 2.9% annually during 2011-2018.
In our blog Gold at Discount, we talked about the advantages of Sovereign Gold Bonds over Physical gold. That was in September 2018 and SGBs were quoting at a discount of 10% that time. The discount started shrinking once gold started its upward rally in April 2019.
From Rs. 3100 in April, Gold touched a high of Rs.3984 during September 2019, rewarding investors with a 25% return. Yellow metal has seen this spike on account of:
- US-China Trade War
- It’s safe haven status
- Rupee weakening against USD
On a year on year basis, physical gold rallied by over 24% (Gold MCX data).
(Period in consideration: 1st Oct 2018 to 30th Sept 2019)
During the same period, instruments proxy to physical gold yielded the following:
| Product | Return |
| SGB Nov 24 Maturity (Highest Traded Bond) | 36.2% |
| Gold ETFs (Average of 12 ETFs) | 25.9% |
| Gold Index Funds (Average of 11 Funds) | 21.9% |
Way Forward
Even today, exposure to Gold assets via SGBs (bonds nearing 5 years of redemption lock in) can be considered on account of the following:
- Definite Alpha over ETFs to the extent 3% (2.5% annual interest + 0.5% brokerage savings).
- Bonds can be redeemed after five years from issuance date on the dates when interest is payable.
- Capital gains on redemption is fully exempt from tax.
If the horizon is for a short term, investors should look at ETFs as SGBs are thinly traded and pricing may be a disadvantage.
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