'Gold will be the best asset class to invest in 2019'

'Gold could return 10% to 12% in the next two-three years.'

With gold futures prices spiking up from Rs 31,422 on January 1 to Rs 34,905 on July 12 (source: MCX), the noble metal has given returns of 11% in about seven months into the year.

Given its tepid range of Rs 29,000 to Rs 31,000 between January 2017 and December 2018, the price movement in the last six months is definitely likely to get retail investors interested.

While retail investors in India had always invested in not-so-cost-efficient physical gold and gold jewellery for want of better investment instruments, the introduction of gold exchange traded funds (ETFs) and sovereign gold bonds (since 2015-2016) as hassle-free vehicles for investing in gold have opened up cost-effective, tax-efficient investment opportunities for long term retail investors. 

While investing in sovereign gold bonds (SGBs) have a huge cost advantage compared to gold ETFs and, of course, physical gold and jewellery, the Reserve Bank of India -- the SGB issuing authority on behalf of the Government of India -- data reveals that investors have purchased SGBs worth only Rs 7,285 crore, amounting to 24.8 tonnes of gold, since it began issuing them in 2015-2016.

Interestingly, India imported gold worth $31.2 billion between April 2017 and February 2018; the figure for the same period between April 2018 and February 2019 stood at $29.5 billion, indicating the huge appetite Indians have for the yellow metal in its physical form.

Now, with the Reserve Bank of India issuing SGBs for 2019-2020 -- Series I/II/III/IV -- from June-September amid rising gold prices in international and domestic markets, the attraction SGBs hold for the retail investor as a cost-effective, tax-efficient form of investment is likely to become greater.

This year, the government in consultation with the RBI has begun issuing SGBs. Two tranches between June 3-7 and July 8-12 are over; the other two tranches will open between August 5-9 and September 9-13).

While the data for the total number of units issued -- one unit is equivalent to one gramme of gold -- will take some time to come,Rediff.com's Prasanna D Zore spoke to three experts to find out their views on investing in gold and the advantages of buying SGBs over gold ETFs and physical gold.

"SGBs are not as liquid as other investment options for gold investors," says Anil Rego, Bengaluru-based financial advisor and founder of the financial and wealth management company Right Horizon.

"While the instrument, if held in demat form, is tradable on the exchanges, there are not enough takers for SGBs. Gold ETFs, jewellery and physical gold, on the other hand offers quick liquidity," Rego adds.

Citing one of the most important advantages of investing in SGBs, Rego says, "SGBs are the best for long-term investors as it gives you a higher yield (annual returns minus tax)."

For the uninitiated, SGBs, over and above capital appreciation, offer 2.5% return on the nominal value, and interest is paid bi-annually.

While interest income earned on the SGBs is taxable as per the Income Tax Act 1961, individual investors are exempt from long term capital gains tax on redemption of SGBs.

While SGBs come with a maturity period of eight years, to make them more liquid, the RBI provides for redemption of SGBs after five years too.

"Investors, for whom liquidity is not a concern, should invest in sovereign gold bond with a three-to-five-year investment horizon. If you don't want a lock-in period then one can go for gold ETFs and physical gold," says Rego.

Rego has given a buy call on gold recently, but wants investors to wait for a decent correction before buying gold.

"Gold could return 10% to 12% in the next two-three years. With a three-year horizon, gold should beat FD returns. Gold can play an important role in hedging your portfolio. One can see a 15% return in gold if there were to be a market crisis."

Deepak Jasani, head of retail research, HDFC Securities, has a different take on investing in SGBs.

"Investors must understand that gold is not an asset on which you should look for making trading profits," he says. "The purpose of investing in gold bonds is to make judicious asset allocation," says Jasani.

Providing an economic rationale for investing in gold or SGBs, Jasani says, "If you are worried about the Indian currency weakening against the dollar or inflation rate to go up then 5% to 10% of your investment should go into gold."

Dismissing that SGBs do not find favour with retail investors because of lack of adequate liquidity, he says, "Invest in gold bonds only if you plan to hold it till maturity."

"One gets a discount too if one pays online," he mentions another advantage of investing in SGBs.

For those who subscribe online or pay through digital mode, the government offers a discount of Rs 50 per gramme/per unit.

For instance, while the June 3-7 tranche was priced at Rs 3,196 per gramme (one unit), those who purchased online paid only Rs 3,146 per unit of SGB.

Every unit of SGB is priced based on three business days average price of 999 purity gold before the subscription period ends and this price is published by the India Bullion and Jewellers Association.

"Instead of going for physical gold, whose quality one may not be sure about, or jewellery that costs high because of making charges, investing in SGBs makes more sense," says Jasani, pitching for investments into SGBs.

"Ideally, 5% to 10% of (an investor's) financial wealth can be allocated to gold," he says.

"Prices (of gold) are already at record level and we expect a slight correction," cautions Harish V Nair, head of commodities research, Geojit Financial Services.

He expects gold to correct in international markets from $1,417 an ounce currently (closing price as on July 12, 2019) to about $1,375 to $1,365 an ounce. (One ounce = 28.3495 gramme).

For the Indian markets, though, he says, "The ideal level for buying would be between Rs 31,000 to Rs 32,000 if the correction happens. Prices are not expected to fall below these levels."

Of all the options available for buying gold, Nair says, "SGB is the best scheme available in India right now for investing in gold. But that should be done systematically. For every tranche of release one has to purchase. There are extra charges when one invests in physical gold, jewellery or gold ETFs. The government is even offering Rs 50 discount on gold purchases if one is buying gold online."

Nair regrets that not many retail investors are aware of the advantages of the SGB scheme and hence are not attracted towards it.

"Gold will be the best asset class to invest in this year."

Photograph: Ajay Verma/Reuters