Buying gold this Dhanteras? Even SGBs don't offer a great alternative

With Dhanteras around the corner, many people are considering investing in gold in some form or another.

While we at Value Research hold a dim view of gold as an investment, we feel that sovereign gold bonds (SGBs) are the best alternative for those adamant about investing in the precious metal because they have two significant advantages: a) the gains are tax-free upon maturity and b) you get 2.5 per cent interest each year.

Sounds appealing, right?

This is where things can get tricky this time of the year. If you're looking to buy SGBs currently trading on stock exchanges, you might face an unpleasant surprise: they're all trading at a premium (higher than its actual price).

When you buy at a premium, you need gold prices to rise by at least that premium amount just to break even. For instance, let's say you invest in SGBs maturing this year. They are currently trading at a 4.9 per cent premium. So, you'd have to pray that gold prices grow 4.9 per cent in the next couple of months so that you can even recover your original investment.

Similarly, the bonds maturing in 2029 in the table below are trading at 5 to 11 per cent premium. Even if gold achieves an annualised return of 10 per cent over the next four to five years, your return from SGB will only be 7-9 per cent. Despite the tax-free gains, you will earn as much or even less than those from gold funds or ETFs (exchange-traded funds).

Only SGBs maturing beyond 2030 present a sensible investing opportunity.

For the rest, your returns will be at par with other forms of gold investing. That said, physical gold, gold funds and gold ETFs have their own limitations.

What you should do

If you're committed to investing in gold, we recommend being patient and waiting for SGBs to trade at a discount, as they have in the past.

Also read: A twist in the gold story

This article was originally published on October 16, 2024.