Sovereign Gold Bonds or the SGBs issued by the Reserve Bank of India are Gold Bonds, where the investor invests in rupee terms, but the bond is issued in terms of gold weight in grams. Since the bond is in terms of Gold, its maturity value depends on the Gold rates on the said date. So, if the gold price has increased on the redemption date, the investor enjoys appreciation in gold value as well as earns interest on the bond. It must be understood that you don’t get physical gold, but a bond which states the gold weight you have purchased. You can invest as little as 1 grams to a maximum of 4 kgs per person.
Unlike the normal securities offered by our Government, where the maturity price is fixed, in case of SGBs, the maturity amount is linked with Gold. Let’s say you invest Rs. 20,000 in 5 grams SGB at gold price of Rs.4,000 per gram, you earn interest at a fixed percentage on your investment i.e. 2.50%. Now, if on the maturity date, the gold price is Rs.4,200 per gram, you get Rs.21,000 (Rs.4,200/gm* 5gms) in addition to the fixed interest on your investment.
Initiated by the RBI in 2015-2016, SGBs offer several advantages:
However, it must be noted that the redemption value of your SGB is totally dependent on gold prices prevailing on the date of redemption. Just in case the gold price is lower than the price on the investment date, you will have to bear the loss.
Global Economy: As the world is fighting the COVID-19 crisis and the IMF has officially said we are entering a recessionary period, gold investment becomes your best and a safe haven in times of financial uncertainties.
Political Tensions: Apart from COVID-19, the geo political conflicts are another reason for turning to SGBs. For example, the US and Iran are at loggerheads, the on-going trade war between the US and China as well as the presidential election in the US in 2021, is likely to firm up gold prices in future.
Purchase of Gold by Central Banks: Report from the World Gold Council reveal that Central banks purchased 589 tonnes of gold in first three quarters of 2019. Owing to the uncertainties prevailing in the global economy and especially in the US policy making, the Central bank will continue to diversify its reserves in a bid to lower its dependence on US dollar.
Fed Cuts: The US economy is losing its steam. Their annual growth is just 1.9%. As the US becomes the latest hotbed for COVID-19, their growth is likely to be curtailed further. This makes gold and SGB one of the best investment options.
With so many reasons for appreciation in gold value, why not invest in SGB and reap interest income too? Invest in SGB today!
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