Sovereign gold bonds are open for subscription starting today (July 6, 2020) and will end on July 10, 2020. Should you invest in them? Sovereign gold bonds are issued by RBI and thus are one of the safest investments. If you like to invest in gold, but don't want to hold physical gold, this is a good option for you. The issue price is set at Rs. 4,852 per gram, but if you buy online, you get a discount of Rs. 50. You have to buy a minimum of 1 gram up to a maximum of 4 kgs. But is this a good investment? If you rather watch a video instead of reading then scroll to the bottom of the post.

Benefits of sovereign gold bonds

Lets first see the benefits of sovereign gold bonds. First, you have safety of your investment. No one can steal your gold. There is no credit risk. There isn't even interest rate risk if you hold till maturity (8 years).

You can benefit from the appreciation of the asset without actually holding gold. So if the gold appreciates like it did during parts of the last decade, you will strike gold ;). All that capital appreciation is yours to keep. But it gets even better. There is no tax on capital gains!

Price of Gold

What more, the gold bonds offer an annual interest rate of 2.50% to investors. The interest income will be added to your income and taxed at your nominal tax slab. So, in addition to the capital gains, you will also receive annual interest. If the gold appreciates by just 5% every year, these bonds will beat any FD investment currently available. If it appreciates by 7.5%, it will beat equity investment (in my opinion). All this sounds pretty good. Then why not invest in it?

Drawbacks of sovereign gold bonds

The first drawback is liquidity, or the lack there of. While these bonds can be traded in secondary market, they will not be very liquid. Moreover you will not get a good price for it. So invest only if you are sure you won't need the money for 8 years.

The other risk is the price movement risk. In the recent past (2019-2020) gold has done very well. But if you look at the chart from 2012 to 2018, it has not gone anywhere. Now, if you are lucky and the gold appreciates well in the next 8 years, it is fine. But what if the next 8 years are like the period during 2012 to 2018? Or worse yet, the prices go up and just before the maturity date the prices fall down? There is a psychological pain associated with it because you cannot get out even if you wanted to. Well there is an exit option after 5 years, but you should be able to predict the direction of gold prices to take action.

My take

If you don't mind the risk of gold prices falling before maturity and the illiquid nature of the investment, go for it. The pros certainly outweigh the cons. If you want some gold asset allocation, this is a good option. Personally I don't like investing in gold because it is not a productive investment. It just sits there not adding anything to a country's GDP. I'd rather invest in people or industries.

Moreover, I don't like the illiquidity of gold bonds. Liquidity is very important for me. Ironically though, a huge part of my debt investments are stuck in the now illiquid Franklin funds :P.

Finally, I cannot predict value or price of gold. If I could, I would have invested a big chunk of my money in gold before COVID and I would be sitting on huge returns. While I cannot predict stock market either, I at least have earning reports from companies to go by.