Sovereign Gold Bond Scheme 2020-21 (Series VI): Should you buy?

Published: August 29, 2020 at 9:33 am

The sixth tranche of Sovereign Gold Bonds 2020-21 (Series VI) will be available for sale from Aug 31st-Sep 4th, 2020. The issue price of the Bond per gram during the subscription period will be Rs. 5,117 (down from Rs 5,334 for series V). Demand for these bond is up with Rs 1,990 crore in April and May 2020 because Gold beat Sensex over the last 20 years! However,  it is not a product for everyone. A look at who should buy and who should not.

Gold is an extremely volatile asset, in fact, more volatile than stocks from time to time. If you have purchased Sovereign Gold Bonds for returns then your final return will depend on “timing luck” (that is, when you buy)!

Shown below is the Gold USD and Gold INR per troy ounce (31.1 grams) daily data from Jan 1979. Notice how after our economy opened up in the 90s, Gold INR kept moving up only because of the exchange rate. Both Gold prices are better correlated in the two decades.

Normalized Gold USD Gold INR and exchange rate movement
Normalized Gold USD Gold INR and exchange rate movement

Now let us look at the rolling returns. Please pay attention to the “spread” in possible returns for a given duration. The number of data points is indicated in each plot. There are 5992 eight-year data points in each coloured line. Notice that it is simply impossible to say or expect gold would X or Y returns.

8 year rolling returns of gold USD and gold INR price per troy ounce from Jan 1979
8-year rolling returns of gold USD and gold INR price per troy ounce from Jan 1979

Those who want to chase after returns must employ an entry-exit plan such as this – a tactical buying strategy for gold and use ETFs for small sums and gold funds for larger amounts. This tool can be used: Using moving averages for tactical buy/sell

Sovereign Gold Bond Scheme 2020-21 (Series V): Who should buy?

Sovereign gold bonds offer a tax-free, risk-free way to accumulate gold as long as your future gold purchase is more than eight years away*.  You also get 2.5% interest (taxable as per slab) on the initial gold value as a “thank you for reducing gold imports(temporarily)” gift from the govt.

This is risk-free because the bond tracks the price of 24-carat gold and at any given time and after eight years one could buy 22-carat jewellery. * These bonds cannot be sold in the middle of the tenure unless you are willing to take a loss. So if you want to buy jewels after 10 years, buy Sovereign Gold Bonds 2020-21 for the first eight years and then hold cash or buy the gold asap.

When the ultimate aim is to buy gold, returns from gold bonds or any other instrument are irrelevant. When the aim is diversification, then returns from gold should not be a major concern. Thankfully so because gold is volatile that one simply cannot expect 6%, 8%, comparable to inflation or any other number. The variation in returns is simply too great!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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