Gold as an Asset Class (Revisited)

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:

  1. US-China Trade War
  2. It’s safe haven status
  3. 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:

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:

  1. Definite Alpha over ETFs to the extent 3% (2.5% annual interest + 0.5% brokerage savings).
  2. Bonds can be redeemed after five years from issuance date on the dates when interest is payable.
  3. 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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