Gold prices have hit a six-month high of Rs 40,000 for 10 grams on worries of global economic slowdown, US-China trade war and the US yield curve inversion intensified. Globally, the precious metal has become a risk-free asset to hold and its rising prices are indicating that global worries are still intact.
Rising domestic demand
Gold is one of the largest imported items in India. In the three months to June 2018, the country’s gold demand was 213 tonnes—169 tonnes jewellery and 44 tonnes of bars and coins—as compared with domestic demand of 189 tonnes—jewellery 150 tonnes and bars and coins 39 tonnes—during the same period last year. The government increased the customs duty on gold from 10% to 12.5%. While the hike in customs duty will enable the government to raise an additional Rs 4,000-5,000 crore of revenues, it has pushed up the domestic price of gold.
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Should you invest now?
While investment in gold is a useful diversification tool and a good hedge against inflation, an investor should not allocate more than 10% of his total portfolio to the metal. Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, says that gold is a valuable strategic asset for our investments as it plays a stabilising and defending role, minimising downside risk in times of crisis. “Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby help you to reduce overall portfolio risk,” he says.
Investors must understand that while gold prices are rising now, over a long period of time of 25 years the value of the metal increased 8.5 times. In contrast, the BSE Sensex in the same period went up by 9.5 times. As returns from gold can be volatile, retail investors should invest in the metal for some stability when returns from other asset classes are doing well.
While most Indians prefer to invest in the precious metal in the physical form, Sovereign Gold Bond (SGB), gold exchange traded funds (ETFs) of mutual funds are an efficient way to invest in the precious metal. One can also invest in gold funds through systematic investment plans (SIPs) and, in case of ETFs, one can buy each month. However, gold bonds are a better way to invest in the metal as the investment will earn an interest.
Tweak required in Sovereign Gold Bonds
The government launched SGB in November 2015 to lure investors from physical gold to paper gold. Investors get a fixed rate of 2.5% as interest per annum, which is payable semi-annually on the nominal value. Given the fact that India is a big importer of gold—$33 billion or Rs 2.2 lakh crore in FY19—the government needs to take a relook at the market dynamics of SGB Scheme which has got lukewarm responses from investors. Since the first issue in 2015, SGBs have collected around Rs 7,500 crore, translating to 25.3 tonnes of gold. In contrast, India’s gold demand in 2018 was 760 tonnes. The success of the scheme will depend on its availability throughout the year, or on-tap, instead of limited tranches, or window for fresh sale.
Pricing of the bond is a key element to attract buyers. At present, it is fixed on the average price of the last three days before the opening of the tranche. The issue price must be dynamic, following the price at the bullion market on the day of the allotment of the bonds. Even for redemption, it must be the price of the day. Some changes in SGB is required to make it attractive to investors and wean them away from buying physical gold.