The first tranche of Sovereign Gold Bonds (SGB 2015-I), issued in November 2015 are maturing tomorrow (30 November 2023). The final redemption price of the bond has been fixed at Rs6132 per SGB unit. SGB carries a coupon rate of 2.5% p.a, payable at six-month intervals. The investors in SGB (2015-I) have thus earned a 12.7% CAGR on their investment.
To put this return in context, the Nifty50 index has grown at 12.4% CAGR in this period. An average Large-cap mutual fund has yielded ~13.75% CAGR; an average Small-cap fund has yielded ~23% CAGR and an average Gilt fund has yielded ~7.25% CAGR over the past eight-year period.
Of course, the return of equity and gold are not comparable as equities carry much higher risk and entail significantly large volatility. The risk profile of SGB and a normal gold ETF is different since SGB bears a coupon of 2.5% p.a., has no management fee, and carries an implicit sovereign guarantee. It may be considered better than holding physical gold as it is offered in dematerialized form and thus has no holding cost or theft risk; though there is a potential roll-over risk. Besides, if held till maturity, the return on SGB is exempt from capital gains tax, unlike Gold ETF and physical gold which are subject to usual capital gain tax.
The household investors who shall receive the redemption amount in a day or two therefore face two questions —
(i) Whether they should maintain their allocation to gold, reduce the allocation, or increase the allocation under the current circumstances?
(ii) Whether they should wait for the next issuance of SGB and redeploy the redemption proceeds in such bonds (last SGB issue happened in September 2023 @Rs5923)?
I would like the household investors to consider the following data points in answering these two questions:
· A significant part of return on gold is due to the depreciation in the INR as compared to USD. Adjusted for USDINR variation, SGB (2015-I) return would be ~10.3% as compared to the present 12.7%. A weaker USD, as widely expected, could negatively impact the SGB returns in future.
· The current USD gold price is almost the same as it was in July 2020. In this period Indian gold prices have risen ~20%. Adjusted for USDINR changes and hike in custom duties, the Indian gold prices have hardly changed since then. So, investment in gold has been more of a currency and duty arbitrage than anything else. Remember, the last three years have seen pandemic, massive monetary dilution, unprecedented fiscal profligacy, four-decade high inflation in the developed economies, worst geopolitical crisis in Iraq war, huge gold buying by central banks – all catalyst for a super bull market in gold, if we analyze from a historical perspective.
· At the current price, SGB issued in August 2020 are yielding ~5.5% CAGR only, less than an average gilt fund. Considering that interest rates might have peaked, return in gilt funds could improve further in the coming years.
· Bitcoin, which is gaining popularity as an alternative asset, has massively outperformed gold in the past eight years, three years and one-year timeframes. It is widely forecasted to continue to outperform the yellow metal in future also.
