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Shift some money from deposits to sovereign gold bonds, say experts

Investors could put money into the seventh series of the Sovereign Gold Bonds opening on Monday as analysts believe the recent decline in gold prices could be temporary. Wealth managers are advising clients—especially the rich– to shift some money from fixed deposits to Sovereign Gold Bonds citing bullish outlook for gold and lower taxes.

In the latest gold bond offering, which will end on October 16, investors will have to pay Rs 5001 per gram of gold after the Rs 50 per gram discount for digital payments. This is about 1.3% lower than Rs 5067 per gram that they paid for the last issue in September. Gold prices have moved up by 28.2% over the last one year.

Several investors are accumulating gold as a safe asset because of rising deficits in most developed economies and the decline in the dollar. The yellow metal is considered a hedge against inflation and a weakening dollar. With the flood of money by governments and central banks expected to stoke inflation, investors are buying gold.

“Ultra-low interest rates, soaring deficits and debts, rising inflation and debasement of dollar that caused the bull market in gold, are very much intact,” said Chirag Mehta, Fund Manager, Quantum Mutual Fund. “Irrespective of who wins the US Elections, strength in gold prices will continue as the stance of low real rates, further quantitative easing and government stimulus would not change given the state of the global economy is not changing in the foreseeable future.”

Gold prices have corrected 7% from their August 6 high of $ 2060 to $1915. Domestically, the fall has been sharper at 11% with prices down to Rs 51,250 per 10 gram from Rs 57,500.

Wealth managers said those in the high tax brackets could consider sovereign gold bonds as an alternative to fixed deposits. “The extra interest, tax free maturity status of sovereign gold along with likely price appreciation in gold, makes it easy for this product to beat fixed deposit returns post tax,” said Uttam Aggarwal, Chief Business Officer, Bajaj Capital.

While capital gains tax is exempt if held until maturity, the product fetches 2.5% as interest in additional to the gains. Gold ETFs are taxed like debt funds.

“HNIs looking for higher post tax returns, with an objective of holding gold bonds till maturity and not worried about liquidity to move some money from fixed deposits to sovereign gold bonds,” said Aggarwal.

Sovereign gold bonds have a tenor of eight years, with investors having the option to exit after the fifth year on interest payment dates.

Data from the Reserve bank of India (RBI) and Association of Mutual Funds of India (AMFI) showed investors bought gold worth Rs 10,130 crore in the first six series of sovereign gold bonds in the first five months of the current financial year and pumped Rs 3,900 crore into gold ETFs. In the same period last year, they had bought gold bonds worth Rs 5,741 crore and gold ETFs worth Rs 75 crore.

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