We recently conducted a poll on X (formerly Twitter) – “Why are you invested in Sovereign Gold Bonds?”. We asked a similar question on the Facebook group Asan Ideas for Wealth. The results were similar and suggest that most investors buy Sovereign Gold Bonds for the wrong reasons.
The X poll had 1154 participants. The results are shown in the screenshot below. I will be very surprised if the results do not represent all investors interested in Sov. Gold Bonds.
Most investors buy Sov Gold bonds to hold them for eight years. That is the only way the gains (if any!) are tax-free. This is perfectly fine if the intention is to buy physical gold at the end of the tenure.
In fact, this is a risk-free and efficient way to fund a future gold purchase. This is the only rational reason for buying these bonds. Sadly only about 19% of the participants buy with this idea. The reasoning behind the rest of the vote is, to put it mildly, poor.
Buying something because it is tax-free or only returns has little rhyme or reason. It is the equivalent of gambling with our hard-earned money. The 8Y returns from gold are extremely volatile, as seen below.
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How about buying them for ‘portfolio diversification’? Adding a “small amount” of gold to a portfolio does not help. For some data, see: Can I add 10-20% gold to my 15-year investment portfolio? It does not do any harm either, but that does not mean it makes sense!
Adding a new asset class involves labour. You must reset the asset allocation when they deviate by 5%. This reset (wrt gold) has to be done by selling gold and buying equity or fixed income or buying gold by selling other asset classes.
NO! You cannot “adjust” the asset allocation by adjusting the investment amounts because this will take longer and longer to accomplish with time as the portfolio grows, defeating the purpose of rebalancing – reducing portfolio return volatility.
Even such an “adjustment” is impossible with Sov Gold Bonds because they are not liquid; you cannot freely buy or sell them in the secondary market unless you are willing to pay a huge premium or take a huge loss. They are not always available in the primary market either. So this would be di-worsification, like letting your garden grow unattended.
If you “must” add gold to your long-term investment portfolio, use a multi-asset fund and be done with it. For recommendations, see Plumbline: Handpicked Mutual Funds. The fund manager will take of the asset rebalancing and we pay no tax on such rebalancing.
In summary, yes, the poll results reiterate our strong belief that most investors are buying Sovereign Gold Bonds for the wrong reasons. They are only suitable for a future gold purchase. Other uses (e.g. hedging) do not hold water.