Why is there a price difference between the different traded SGBs and spot Gold?

[Harshal_Sakare]

• Why is there a price difference between the different traded SGBs and spot Gold? Today (7th August 2024), gold is around 6900 in India and SGBs trade between 7500 and 7900. Specifically, SGBFEB32IV is 7912.
• Why there is a 1000 difference between spot gold and SGBFEB32IV?
• I know, there is a benefit of 2.5% on SGB, which results in a premium. But there is nearly a 14% difference in spot and SGB. Can anyone explain this with an example along with calculations in depth?

[Meher_Smaran]

Can check these threads for discussion on this topic -

SGB pricing in Secondary market

The LTP for SGBFEB32IV is currently trading around 7912/gram but the current market price of GOLD is ~6894. So why is it trading at such a high premium? Also given that it was issued at a face value of 6263 i.e. I am getting Interest on only 6263 instead of CMP, so the SG bond should trade lower than the CMP ( ignoring any accrued interest for the last 6 months)? In some places, I found that to find the fair value of SGB we need to ADD “All the future interest payments in present value”. Does…

Sovereign Gold Bonds are trading 7% higher than actual gold prices. Why?

Has anyone noticed how SGBs which have 5+ years maturity left are trading at a 7-8% premium to actual gold prices in last few days?? Can anyone help me understand this phenomenon Current SGBs are trading upwards of 7700 per gram when their benchmark cost is more close to 7250…

SGB price variation - clarification needed

It is not the price of gold. What you are seeing is the last traded price of that SGB in the secondary market. This depends on the supply demand of (different) SGBs on secondary market - irrespective of the underlying price - you can actually take advantage of this. Price of SGB is equal to price of Gold only at the time of issue and at the time of redemption. Redemption is different from selling it in secondary market. Redemption of SGB can happen only after 5 years of issue, the process of wh…

[Harshal_Sakare]

Thank you for sharing related topics. However, no topic explains the exact calculations behind the premium of SGB over the GOLD. Do you have any specific examples in layman’s terms.

[tallerballer]

RBI has most likely stopped issuing new SGBs. So old ones are in demand.

Hence increase in price .

Also SGB pays interest. If maturing in 32, it’ll pay interest for 7-8 more years. 2.5 * 7 = ~15%. So that will also be factored in by some sellers.

[Harshal_Sakare]

So, I’m just putting out my thoughts here:

• Current Gold Price is: 7000/-
• Whereas, SGBFEB32IV’s Current price: is 7900/-
• SGBFEB32IV face value is 6263/- Which will give me 1096/- in 7 years with 2.5%. Which is greater than the premium.
• Considering the 30% income tax bracket, it will be 767/- pocket. Which is less than the premium.
• However, when it matures, there is no LTCG on SGB.

So, conclusion: If you are buying long-term, SGB is still a better option than Gold OR GoldBees.

Please let me know if anyone has any other perspective to look at.

[get_pi]

The price difference between traded Sovereign Gold Bonds (SGBs) and spot gold arises due to several factors:

1. Interest Component: SGBs offer an annual interest of 2.5%, which is not present in physical gold. This interest component affects the bond’s price, making it slightly higher than spot gold.
2. Liquidity: SGBs are traded on the stock exchange, and their liquidity can vary. If a particular series of SGBs is less liquid, it might trade at a discount or premium compared to spot gold.
3. Maturity Period: SGBs have a fixed maturity period. Bonds closer to maturity might trade differently compared to newer bonds due to the remaining interest payouts and proximity to redemption.
4. Market Sentiment: Investor demand, supply, and overall market sentiment towards gold and bonds can create price differences between SGBs and spot gold.
5. Tax Benefits: SGBs offer tax benefits, like exemption from capital gains tax on redemption. This can influence their trading price.

These factors combined lead to variations in prices between SGBs and spot gold.