Demand for sovereign gold bonds dips; here’s why

The demand for gold bonds seems to be stemming as gold prices have shot up recently, say experts

Demand for sovereign gold bonds dips; here's why
Representative Image (Unsplash)

Demand for Sovereign Gold Bonds seems to be fading as gold prices are on a rebound. Gold prices have risen 8% in May ending the third consecutive month with gains. Prices have recovered from a two-month low on account of rising concerns over inflation, easing bond yields, and a weaker dollar. Gold prices in the international markets were hovering near $1,900 level on Friday.

A Reuters report was quoted in media reports suggesting, “The third tranche of sovereign gold bonds for FY21-22 received a subscription for 14.79 lakh units, 72% lower than 53.19 lakh units purchased by the investors in the first tranche. It is even lower than the units purchased in the second tranche. In the second tranche people purchased 18.98 lakh units.”

Why is demand for Sovereign Gold Bonds dwindling?

To understand that in the context of gold prices, one can simply compare how the third tranche was priced at Rs 4,889 per unit (one unit is equal to one gram of gold), the second tranche was priced at Rs 4,842 per gram and the first tranche was priced at Rs 4,777 per unit. This increasing price of bond units in tandem with spot rates and market rates rising is being seen as a major reason for the drop in demand.

Not just Sovereign Gold Bonds, even the net inflows in the gold exchange-traded funds (ETFs) dipped to a six-month low in May at Rs 287.86 crore as per the data released by the Association of Mutual funds of India.

Kunal Shah of Nirmal Bang Commodities said, “The demand for gold bonds seems to be stemming as gold prices have shot up recently from Rs 43,000-49000. Also, the awareness of this product is still low in tier 2-3 cities where people invest mostly in physical gold”

The World Gold Council in its recent report had also mentioned, “Indian consumer demand (for gold) was heavily impacted by Covid-related lockdowns”. This was in contrast to the inflows seen in gold in US, UK and Germany, and China.

What should gold investors do?

Most commodity experts are bullish on gold and believe the demand for the physical yellow metal is likely to increase in coming months as the expectations of higher inflation, central banks tapering is also expected to drive the prices of the yellow metal.

Sovereign Gold Bonds

If you are planning to invest in gold, sovereign gold bonds are considered one of the best options as apart from the increase in price, investors also get a fixed interest of 2.5% per annum on the amount invested. Sovereign gold bonds are also tax efficient for long-term investors as the capital gains on the same are tax-free if held till maturity that is 8 years. However, experts say that only those investors who want to invest in gold for the long-term should opt for gold bonds as they may find it difficult to exit before maturity. One can exit before maturity by selling the bonds on exchange. Premature withdrawal is possible after 5 years.

Gold ETFs

Gold ETFs are commodity-based mutual funds that invest in gold as the principal asset. Gold ETFs are passive investment instruments that aim to track the domestic gold price. It invests either in physical gold or stocks of companies engaged in gold mining or refining. The units of a gold ETF are traded on a stock exchange, just like stocks. One unit of a gold ETF represents one gram of gold. Investors need to have a demat account to invest in gold ETFs. Experts say that for investors looking for a cost-effective option to invest in precious metal, then gold ETF is considered to be the right choice.

(Follow Money9 for latest Personal finance stories and Market Updates)

Best of Money9