SOVEREIGN GOLD BOND – AVOID BUYING AT RS. 5334

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SOVEREIGN GOLD BOND


Sovereign gold bond is one the investment type which attracted the investors in recent days. As the equity market had a crash of 38% fall, investors shifted the focus towards Gold.

As the Sovereign Gold bond scheme of 2015 has yielded 16% per annum. This gave a boost to all investors looking towards the scheme.

In FY2020-21, the Government of India decided to launch the same scheme with 7 series from April to September. Already 5 series has launched and enrolled, currently 6th series is going on at Rs. 5334 per gram.

Here are the number of reasons not to invest in this gold bond at Rs. 5334.

 

For details on the basics of SGM please click here.

 

GOLD PRICE PERFORMANCE:

 

·       In the last one year, the pure gold price has increased from 37570 to 55745 with 48% growth.

·       This is a phenomenal growth in the gold market. This situation is because of high demand in Gold, as investor moved from investing in equity to gold.

·       As demand increased, the price climbed up. In India, when there was a relaxation in lockdown, the total crowd moved towards jewelry shops.

·       As same to equity, the price of gold fluctuates. It has a periodical growth at the time of pandemic or economic crisis.

·       Once the economic condition revives back, gold price becomes flat and equity investments increase in other arms.

 

EXPECTED RETURN ON INVESTMENT:

·       We are not going to expect the return which it delivers today if invested in 2015.

·       We can take a nominal growth rate on investment. We just plan to achieve an 8% return per annum to overcome inflation.

The government of India provides the investors 2.5% interest per annum.

·       So, our aim of ROI is 5.5% per annum. If so, the gold rate has to be at Rs. 8186 after 8 years (2028) which is the tenure of this scheme.

·       Once again we have to understand, for just a 5.5% return the gold rate should be at Rs. 8186. Which is not a possible thing that gold to be at Rs. 8000 in 8 years.

·       Even if we check at a 3.5% return every year, the gold price should be at Rs. 7023. Even this so critical in 2028. As Gold’s price is at its high peak of almost more than 20% growth in the last two years.

·       Even if the gold price reaches 7000, the growth is 3.5% plus 2.5% from GOI. So, the total growth will be 6%.

·       A 6% return is not an ideal return for a long term investment of 8 years. Still, it is equal to FD and post office savings bank returns.

 

In the next 8 years, the gold rate will be around 5000-6000, because the market will tend to revive back and Investors will move towards equity

 

RELATIONSHIP BETWEEN GOLD AND SHARE MARKET:

 

·       There is a relationship between gold and equity market for more than a century.

·       Both are opposite to each other. When share market falls, gold price increases and vice versa.

·       This is because Gold tends to be the real currency. The currency grows only with inflation. The inflation increase when there is an economic crisis. The economic crisis will directly reflect in the share market.

·       As the share market falls, inflation increases and creates a great demand for gold. So, Gold price increases.

·       When the market is in good condition and the economy in good shape, the gold price tends to be flat. There will be not much growth in price.

 

That’s the reason, we say that the price of Gold can move more than 7000 but will remain under an average value of Rs. 5000-6000 at 2028.

Anyhow golf price will not fall below Rs. 4500-5000.

 

WHAT INVESTORS HAVE TO DO:

 

·       Investors who look for more than 8% return, should avoid SGB buying at a high price of Rs. 5334.

·       SGB will not provide more than 8% after 8 years.

·       For emergency purposes, you can have gold up to 500 gm and it is advised to buy at the current situation. Either it should have bought before 2019 or wait for another 1 or 2 years.

·       Investors should be ready and wait for the opportunities in the market. Be ready with your companies to ready. When the price reaches its intrinsic value, which will be the right time.

·       Till then invest your funds in debt funds like liquid funds, ultra-short funds to protect your capital and to get minimum 7-8% return for the next 2-3 years.

 

CONCLUSION:

 

·       This series VI of Sovereign Gold bond is meant to be avoided as the price per gram is too high of Rs. 5334.

·       The expected gold rate will be 5000-6000 in 2028, so the growth per year will be 2.5-3% only. Adding GOI 2.5% interest, the total interest gained will be 5% only (Maximum).

·        For a long term investment of 8 years, minimum return should be 8%. If not avoid those types of investments.

·       8% return per year which includes governments 2.5%, i.e. 5.5% return per year will make the gold price at Rs. 8200. This is not a possible figure in 8 years



Kindly have a look on the below topic by The Economics Times

Why some investors may give Sovereign GoldBond Scheme a miss

 

 

 

 


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