The insatiable appetite of Indians for gold was putting a strain on the nation’s forex reserves. As India depends largely on imports to fulfill the domestic demand, higher gold imports caused Current Account Deficit (CAD) to widen. As a remedial measure, the Government imposed a higher import duty on gold and discouraged the demand for physical gold by issuing sovereign gold bonds in tranches. The first tranche, released in November 2015, has recently started trading on the Bombay Stock Exchange (BSE). The issuance price of a bond was Rs 2,684 per gram, while the listing price has been Rs 2,986. By the closing on the first day, the price shot up to Rs 3,180.

The closing price on day one was 6% higher than the spot price of gold in Mumbai.

Why prices of bonds are trading at premium?

The Government hasn’t come up with any issuance after March 2016 in the primary market.

The premium also reflects the 2.75% interest that the Government is committed to pay every year. Gold has moved higher since November 2015 making investors take a bullish view on the precious yellow metal.

PersonalFN is of the view that, before you jump into the secondary market to buy or sell sovereign gold bonds, you should consider the following:

• There’s no Security Transaction Tax (STT) imposed on trades in sovereign gold bonds.
• Minimum trading lot size is one gram.
• The gains made after 3 years qualify to be claimed as long-term capital gains and thus are eligible for indexation.
• Gains, if any, are exempt from the tax at maturity.
• The interest accrued to the bondholders won’t be subject to TDS (tax deducted at source).
• Bonds can be used as collaterals with banks.

PersonalFN discourages you to trade in bonds, the gold is essentially an asset that allows you to counterbalance the risk of other asset classes. Therefore, rather than to accelerate profits, you should treat gold as a diversifier asset. PersonalFN believes a smart investor should hold 10%-15% of their assets in gold. Buying the yellow metal in paper form has many advantages that are missed when you buy gold in a physical form. Gold bonds and gold ETFs (exchange traded funds) are the best options to invest in gold.
 

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