Sovereign Gold Bonds(SGB) - An idea that was begging to be grabbed with both hands

• While tax benefits should never be a reason for an Investment thesis, but SGB was an investment idea begging to  be grabbed with all hands couple of years back. It was just too good to be true.

• SGB solved for all traditional problems with physical Gold as investment class:

 1. Illiquidity

 2. High transaction costs/High buy-sell spread

 3. No Fund management fee to be paid as for Gold schemes/Mutual fund SIPs. 

 (You could buy it directly on RBI direct retail website/through Banks)

 4. No storage costs

•  Further Govt/RBI sweetened the deal with :

 1. Sovereign guarantee

 2. SGBs were tradeable on RBI platform (Although low liquidity)

 3. 2.5% Interest on Face value, will be sizeably less now due to run up

 4. “Zero” capital gains tax in case you held to maturity

• At that point, Gold was also on cusp for a re-rating with tailwinds of poor performance running into a sizeable time period and escalating global uncertainties.

• Alternate option was to buy gold miners listed in US (Van Eck Gold market etf), but you would need to get into headache of repatriating dollars vide LRS, paying high transaction costs and hold money outside India which has tax implications. Hence SGB was a ‘no-brainer’

• The fact that Government didn’t hedge their issuances was something not very intelligent but why bother as investor, the tax payer will bear the brunt.

• While Warren buffets classic argument is why buy a cube of gold when you can buy producing Companies which contribute to the economy. But as rules of the world change, there was some merit in having some allocation to gold given its long history as a reliable asset class (better than going Bitcoin way ). Eventually a small sub 10% position bloated due to the run up to a sizeable position.

• Most retail investors end up chasing a fad and overvalued asset class rather than under valued asset class and are now trying to get into gold. Please note that Gold is a very volatile asset given it is an insurance against mismanaged global fiscal policies. In case it keeps doing well as an asset class there will be much bigger problems in balance part of your portfolio.

• However a position of 5-10% depending on personal comfort, accumulated over a longer span is a much better way to play gold. You can buy SGBs in secondary market gradually. (There is no chance of Government issuing more SGBs in near turn given the Rs 1.2 lakh crs bill they have set up based on current price). Look out for the transaction costs because the markets are very illiquid and you do not end up buying way about market price. Alternatively, a Mutual fund Gold SIP might be a more practical way for investor who does not have time or bandwidth to manage portfolio. Please avoid building a big position at this juncture.