Are Sovereign Gold Bonds safe?

Published: October 28, 2021 at 10:03 am

Last Updated on August 22, 2022 at 11:15 pm

Over the last couple of weeks, three readers have asked me why their Sovereign Gold Bonds decrease in value and how they can lose their principal in a bond with a sovereign guarantee. So, what is sovereign about these bonds?

First, consider a simple bond issued by either RBI or the central or state governments. These have a sovereign guarantee, but on what?

Suppose the bond has a tenure of ten years. The government is offering you a guarantee (except on rare occasions of default) that it will pay the interest on the bond each year (bi-annually). It will return the purchase price after the tenure competition or if the bond is called back.

A Sovereign Gold Bond (SGB) works quite differently if you buy one, the govt. Is guaranteeing the payment of the 2.5% interest as an “incentive”  and is guaranteeing that the redemption value will be equal to the average of the previous three business days gold price.  That is all. This is quite different from the guarantee in a normal bond.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The RBI FAQ puts this across in an amusing way:

Are there any risks in investing in SGBs? There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold that he has paid for.

Right, most comforting! So there is no protection for your capital in a Sovereign Gold Bond. There is another important distinction. If you buy a gilt or RBI bond and monitor the bond’s market price, it would fluctuate quite a bit (longer the tenure, more the fluctuation).

You get your money back if you hold a gilt to maturity, but there can be a capital gain or loss if you sell it mid-way. In the case of SGBs, loss or gain is possible if you sell mid-way or hold to maturity.

Many SGB investors are under the incorrect assumption that “gold will always move up in the long term”, which means they will never lose money.

I am afraid this is quite incorrect. The price of an asset moving up over the long term has nothing to do with its return over the long or short term. Many stock investors also make this mistake.  Here is the actual data for both stocks and gold.

We have already shown that gold is an extremely volatile asset, and returns cannot be predicted: How much return can I get from Sovereign Gold Bonds?

Here is an updated rolling returns chart for gold in INR. This shows every possible eight-year tenure (9083 data points). Data is sourced from

8-year rolling returns data for Gold price per troy ounce in INR and USD
8-year rolling returns data for Gold price per troy ounce in INR and USD

You can see how much the gold price can fluctuate over the tenure of an SGB, and it is just about potluck what return you get. Gold INR will not always offer a better return than GOLD USD over eight years.

This volatility will not go away! These are 6997 16-year rolling returns.

16-year rolling returns data for Gold price per troy ounce in INR and USD
16-year rolling returns data for Gold price per troy ounce in INR and USD

Gold INR returns have ranged from 5% to 14%. Please note that a 5-6% return from gold after 16 years is a loss considering the kind of volatility you will have to suffer. Notice how the current arbitrage has dramatically reduced over this tenure – an example of “India shining”! Eight years or 16 years tracking gold price is not a guaranteed hedge against inflation. Physical gold is a hedge against current collapse, but we must have enough oodles of it!

What should investors do?

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)