Poor response and lacks knowledge.
Giving recommendations with a disclaimer is fine. Here, with Zerodha there is no disclaimer attached. Also, the other stockbrokers just put the recommendations on the table without any opinion. It may be correct. It may be wrong. The disclaimer supports it. It’s up to the investors now. Here, Zerodha is using the word ‘best’ option for SGB which is a superlative adjective and in legal terms a claim by Zerodha, which sounds like a verdict, which I am telling your team to be careful about. The choice of words, and how you present the facts without being biased. If this post had mentioned the pros and cons of each and let the investors decide whichever way they want to go, it would have been the right way.
SGB is also under lock-in for 5 years. Please remember that as well and the trade volumes in the secondary market are almost negligible. So, if you want to book profit and quit or exit to cut loss, you won’t be able to do it. If you see the drawdowns of Gold, you would find that it is more volatile than 2.5% annual returns.
It indeed is something we should focus on. Because the reserves Govt. has is the taxpayers’ money only. Also, if Govt. decides to print money to cover the deficit, like the US Fed has been doing, it furthermore puts the economy into stress, and the Gold price soars again. So as an investor I would like to be informed about how Govt is earning to pay back the investors.
As I mentioned before, if SGB was helping Govt’s to increase Gold reserves, it would have helped the Rupee currency become stronger boosting the Indian economy. It would have helped in nation-building. But it’s not the case. A large chunk of this yellow metal imports is still used for jewelry and ornaments as it is considered an auspicious metal in Indian culture i.e. personal consumption. The portion for Gold as an investment is anyway less. So, regardless of SGB or not, people would tend to buy jewelry. Now that the festive and marriage season has begun, please notice how Gold is being bought and used.
I don’t want to drag it any more, personally I believe if one want to invest in gold then SGB is the right option but one want to use gold as hedge when everything (defaults, deep recessions, war) screws up then holding physical gold is the right thing.
Sir, in investing at some point you need to trust someone.
If you are buying SGB, you need to trust govt
If gold ETF … u are trusting MF to pay you back (remember Franklin?)
If you are buying physical gold … Need to trust jeweler who sold you (multiple instances of lower quality gold sold with fake certificates)
If you don’t trust anyone of them … Keep everything in bank. But then u are trusting bank (PMC??)
Better to keep cash at home … but then again you need to trust govt (demonetization)
So choice is yours … whom to trust
You are right. Trust is important. But always verify. It’s even more important. Otherwise, later you would be like - Mona, kahan hai sona…??
Regarding SGB, as I had mentioned about the true sense of diversification in order to reduce risks -
I do have some investments in SGB and my say is -
There have indeed been instances when it has been considered that GOI breached the sovereign guarantee or was very close to breaching it.
The most famous example is the abolition of Privy purses. Even though the amount due was around 4 crores annually & it was guaranteed directly by the Constitution, the Govt of that time decided to do away with it. Nani Palkhivala summarizes that issue briefly (From 3:19 to 5:02)
SSNNL Bonds. This matter remains sub judice & doesn’t directly involve the central government (instead, a state government is involved). Here the interest liability is upwards of 12,000 crores (on the borrowing of 570 crores) as mentioned in an article. A separate article by Aarati Krishnan explains this issue well - Myth of sovereign guarantee.
The recent GST shortfall fiasco. Even though GOI shrugged off the responsibility of the shortfall on the GST Council and there was a political slugfest with accusations of a sovereign default, parallelly anticipating the shortfall will ultimately become GOI liability, well before GOI announced the extra borrowing of 1.1 lakh crore a week back, RBI had told banks that if they buy another 3 lakh crores of government bonds, those wouldn’t be needed to be marked to market (as mentioned in an article)
Most of them can be attributed to change in the policy outlook compared to when the sovereign guarantee was promised.
As per the 2019-20 RBI Annual report, a total of 9,652.78 crores (30.98 tonnes) has been raised through SGB (37 tranches) since its inception in November 2015 (Page 190). The gold price has appreciated around 80-90% since then (The price per gram was fixed at Rs 2684 in the first tranche whereas latest tranche had its price fixed at Rs 5051 per gram). Data about increase/decrease in gold prices in the recent past -
Hypothetical, even if all the money (9652.78 crores) was raised via the first tranche (which isn’t the case), even then the obligation on GOI would be approximately around 19,000 crores as per the current gold rate. Given that GOI raises over 40,000 crores on a weekly basis via auction of T-Bills (Issuance calendar for Treasury Bills) & Government securities (Issuance calendar for Government Bonds (GOI Dated Securities)), I don’t think GOI will have any issue in repaying back SGBs. Recently there have been auctions in which government securities have remained unsold but normally this doesn’t happen.
Also, if all else fails, RBI has gold reserves of over 650 tonnes, out of which around 100 tonnes have been added in the last 3 years (over 3 times more than total SGBs sold till last FY). Hence, even if gold prices go crazy, GOI does own the underlying asset and can just sell it directly to meet the obligations arising from SGB
But please keep in mind, these are all my speculations (more about this later)
GOI reserve isn’t only the taxpayer’s money. It has its own assets (around 17 lakh crores in form of land, equity, etc) and it is trying its best to raise money by selling them (Even though its disinvestment targets currently look unachievable).
But I agree that taxation is indeed a sweet spot for GOI, which it can tap into whenever it needs funds. The best example being the taxes on fuels (around 200% markup on the original price, with further hikes likely)
This website sheds some light on this -
The issuance of the Sovereign Gold Bonds will be within the government’s market borrowing programme for 2015-16 and onwards. The actual amount of issuance will be determined by RBI, in consultation with the Ministry of Finance. The risk of gold price changes will be borne by the Gold Reserve Fund that is being created. The benefit to the Government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.
(ii). Bonds will be issued on behalf of the Government of India by the RBI. Thus, the Bonds will have a sovereign guarantee.
(xv). The amount received from the bonds will be used by Gol in lieu of government borrowing and the notional interest saved on this amount would be credited in an account “Gold Reserve Fund” which will be created. Savings in the costs of borrowing compared with the existing rate on government borrowings, will be deposited in the Gold Reserve Fund to take care of the risk of increase in gold price that will be borne by the government. Further, the Gold Reserve Fund will be continuously monitored for sustainability.
(xvii). The deposit will not be hedged and all risks associated with gold price and currency will be borne by Gol through the Gold Reserve Fund. The position may be reviewed in case ‘Gold Reserve Fund’ becomes unsustainable.
I am not aware if this original policy still remains in force or has been tweaked. But, if it remains the same, then it is indeed unlikely that the funds in the Gold Reserve Fund would be able to cover the price rise in gold since the first tranche of SGB. It is likely GOI will have to resort to some different method (like the speculations that I made above or something different) to meet the obligations from these bonds when they mature as GOI has explicitly assigned a sovereign guarantee to them.
I personally think, GOI meets its obligation towards investors by taking on more debt (I think this is how all governments in the world work). An example is NSSF (which manages PPF, NSC, SCSS, etc) which is around 17 lakh crores in size and is used for giving loans to FCI, NHAI, etc. In some cases, to service the first loan it has given, it gives another loan (Refer to the last paragraph of this article)
But if you are interested in a general breakdown of how GOI earns money, there is a graphic released with the Union budget which sheds light on that -
The amount of gold reserve of a country cannot directly strengthen the currency of a country because we don’t use Gold Standard monetary system nowadays. As we use a fiat money system, interest rate differential dictates depreciation/appreciation of the currency in the long term under normal circumstances (This concept is explained briefly by Abid Hassan in this video)
@Bhuvan Does SGB bought from the Secondary market receives 2.5% interest
Also, does it have capital gains exemption?
Yes, you are eligible for interest even if you purchase SGB from secondary market.
There are differing views on this. We’re trying to get some clarity
Don’t think so as one should hold for 8 years(till maturity) to get complete capital gain exemption, said that above 3 years one has to pay long teem capital gains ie 20% with indexation.
Another forum member tried asking RBI about this and they got a reply stating that the matter was referred to the Government of India
Other people have also gotten similar replies -
In a follow-up tweet, it has been claimed that capital gain is exempt for individuals even for secondary market purchases of SGB
Yes I think only SGB’s are better option when it comes to investing in Gold. Although SGB needs a high hit amount as it should be bought in multiples but anyone can do that as it is backed up by Govt. of India. For smaller investments you can go for MFs undoubtedly!
No higher amount needed. You can buy 1 unit which is equivalent to 1gm gold…
Are you from Germany or other European country? Because a period is used to separate decimal numbers in India.
Just an innocent mistaken comma bro, no need to question my nationality
I find Digital Gold to be the best option. It is because of -
- Digital gold investment can be bought online and is stored in insured vaults by the seller on behalf of the customer.
- It also helps us overcome all the aforementioned issues of physical gold purchases.
- All you require is Internet/mobile banking and you can invest in gold digitally anytime, anywhere.
The Best Ways To Invest In Gold Without Holding It
- Gold Receipts.
- Gold Funds.
- Gold Mining Stocks.
- The Bottom Line.
Only problem I have in digital gold is spread. The difference between buy and sell spreads in most apps is huge. Something like 3-3.5% or even more. And since there is no evolved market, you will be always at mercy of the app which you have used to buy.
On that front I find gold MF much better option from liquidity point of view.
Off course, SGB is great option if you are not looking at liquidity.
I also faced the same query, but since you are buying and selling the same instrument (having some benchmark) you are not impacted. If you buy India ETF and sell in it International ETF then its a problem (just hypothetical scenario).
Hum_Sa, I was referring to digital gold which is sold on apps like paytm, phonepe. Here there is no market as such and you buy at whatever rate app offers and sell back to them at whatever rate they give, no choice and hence large spread.
I agree with your gold etf statement and I said the same in later part of my past with respect to Gold MF (which is gold ETF)
But digital gold sold on apps is way to expensive.
Moreover if you look at gold as asset then physical is considered as best … Physical is difficult to buy and also sell and hence increases our holding period. Even stocks are to be held for long then why not Gold
SGB is good since no tax whether you buy from primary of secondary the condition of no taxation is redemption should be with RBI only.