 "Yellow metal is off its high, should you invest in gold bonds right now?")
After giving negative returns in the previous three calendar years (2013-2015), gold has rallied around 20 per cent in the Indian market year-to-date. Having run up so much, there is a question mark on whether the yellow metal can repeat its stellar performance in the near term. The possibility of one Fed rate hike this year, and a couple more in 2017, also casts doubt on the yellow metal's prospects in the short term. Experts are of the view that only investors with a long-term investment horizon should invest in the latest tranche of sovereign gold bonds issued by the government.
The sixth tranche will remain open for subscription till November 2, 2016. The nominal value of these bonds was fixed at Rs 3,007 per gram. However, the government decided to offer a discount of Rs 50 per gram, so that the effective issue price works out to Rs 2,957 per gram. The bonds will be issued on November 17, 2016. They will have a tenure of eight years and will allow exit from the fifth year. The interest rate on this tranche has been reduced from 2.75 per cent earlier to 2.50 per cent of the nominal value.
The 25 basis points reduction in interest rates should not act as a disincentive for investors. "The reduction in interest rate merely reflects the fact that rates have fallen within the overall economy," said Bhargava Vaidya, a bullion expert and proprietor, B N Vaidya and Associates. The alternative, which is to invest in gold exchange traded funds (ETFs), is worse since they not only offer no interest but also charge an expense ratio of around 1 per cent, and would therefore set you back by 350 basis points annually compared to sovereign gold bonds.
The bigger question is whether you should invest in gold at this point of time. Experts suggest that you should only invest in the yellow metal now if you have an investment horizon of at least five years. In the near term, a couple of factors could cause the price of gold to correct.
If the US Fed hikes interest rates in December, with the prospect of more hikes next year, that would cause a correction in the price of gold," said Arnav Pandya, a Mumbai-based financial planner. The price of gold has already corrected by around 4.35 per cent in the international market over the past three months.
If the US Fed hikes interest rates in December, with the prospect of more hikes next year, that would cause a correction in the price of gold," said Arnav Pandya, a Mumbai-based financial planner. The price of gold has already corrected by around 4.35 per cent in the international market over the past three months.
The second factor that could bring about a decline is a possible reduction in import duty by the Indian government. "A cut in the import duty would lead to an immediate downward adjustment in the price of gold," says Pandya. The Rs 50 discount offered on gold bonds is being attributed to the government's desire to compensate investors in advance for the fall in price that could be triggered by an import duty cut.
However, if the US Fed fails to hike the rate even in December due to continuing economic weakness in the US, or if a fresh global crisis arises (Germany-headquartered Deutsche Bank is teetering), those factors would be positive for gold.
Vaidya is of the view that with gold having come off a high of Rs 32,000-plus, it is a reasonably good buy for long-term investors. "Have a 10 per cent exposure to gold in a long-term portfolio. It will serve to diversify your portfolio," he said. Gold should be a part of your portfolio in these times when crises tend to occur quite frequently.
Data as on October 24,2016| 2011 | 32.12 |
| 2012 | 12.49 |
| 2013 | -6.89 |
| 2014 | -6.64 |
| 2015 | -6.26 |
| 2016 YTD | 19.7 |