The recent 11% correction in gold prices is a good entry point for those eyeing sovereign gold bonds. The 11th tranche of sovereign gold bonds is open until February 5 and investors will have to pay Rs 4,862 per gram of gold after the Rs 50 per gram discount for digital payments. This is the lowest price in the last seven months and is 4% lower than the January price.
Gold prices moved up 25% over the last one year in rupee terms, while in dollar terms, they are up 18.3%.
“Gold prices have been under pressure due to the rise in US treasury yield and subdued buying activity by Gold ETF investors. Delay and lack of clarity on the next instalment of the stimulus package have pushed yields higher, reducing the investor appetite for the yellow metal,” explains Nish Bhatt, Founder & CEO, Millwood Kane International.
The outlook for gold is bright despite the vaccination drive. Due to the sharp economic downturn, central governments across the world have been continuously pumping money into the financial system. With the effectiveness reducing over a period of time, the need for a larger stimulus continues, which in turn will support gold prices.
“With US national debt crossing $27 trillion in 2020 and amounting to 140% of the nation’s annual economic output, the US dollar has naturally withered and weakened this year,” says Chirag Mehta, Fund Manager, Quantum Mutual Fund. “The world is probably starting to lose confidence that the heavily indebted US can keep paying its bills.”
He believes global policy makers will continue to resort to monetary inflation, credit expansion and government spending to tackle the extraordinary economic fallout of the pandemic. He believes gold, which is priced in dollars, would be a big beneficiary if a crisis of confidence plagues the world’s reserve currency.
Distributors point out that sovereign gold bonds score over traditional modes like buying physical gold or digital modes like gold ETF. Gold bonds are backed by the sovereign, giving investors 2.5% interest every year. Plus, there is no storage cost, making charge, GST and expense ratio and on maturity the capital gains if any are tax free. Financial planners believe investors should have 10% of their wealth in the yellow metal as a hedge against inflation.