Physical Gold cheaper than Sovereign Gold Bonds, what to do next

Gold investors across India seem to be perturbed with a phenomenon-- the August Sovereign Gold Bond turning costlier than physical gold.

The August SGB is priced at Rs 4,740 per gram inclusive of a Rs 50 discount for digital payments. Markets crashed in the last seven days bringing bullion prices to levels of Rs 46,000. MCX Gold futures for August expiry were trading at Rs 46,350 per ten grams while MCX Petal was reported at Rs 4631.

The phenomenon of physical gold costlier than a Sovereign Gold Bond is not the first time for markets. 

What do you do when physical Gold is available at Rs 4,600 levels but the same commodity is priced costlier in paper-format? Of course, any sensible investor will opt for the cheaper variant. Correct? Actually, No!

Physical Gold and SGB may appear similar as Apples and Mangoes (both are fruits). Just like fruits, both are related to Gold. But, the valuation is not alike. If you ask why, here are two simple reasons:

1. SGB pays subscribers an interest. Physical Gold does not. 
2. There is no making charge on SGB while making charge on physical Gold could be anywhere from 2 to 15 percent. There is making and wastage charges even for Coins and Bars.

The price difference in SGB is attributed to how the subscription cost is calculated. The RBI-administered SGB is priced on the basis of a simple average of the price on the last three business days of the week preceding the subscription. The price is based on the retail price tracked by the India Bullion Jewellers Association (IBJA).

There is a likelihood that the Gold market value appreciates or depreciates during the SGB subscription window. However, SGB certainly holds value.

Sensible investors will take cautious bets when markets shower such surprises. Here's a look at some suggestions that you can evaluate:

• To avoid SGB or Subscribe? Your decision will become much easier if you consider the total investment size or returns. The RBI FAQs updated as of 2019 suggests an interest of 2.50 per cent per annum credited semi-annually. For August SGB, this is nearly Rs 120 per gram credited in two instalments through the year. The bond has tenure of 8 years and exit is allowed from the 5th year onwards. You can also trade the SGB on exchanges such as BSE or NSE.
• Is buying Physical Gold Better: If you are planning to buy jewellery, physical gold makes more sense. You may lose the benefit of interest paid on an SGB but you will get what you want - jewellery, in this case. If you are planning to buy bullion, do compare the price and ask the dealer for a buyback in addition to confirming the hallmark and actual weight.
• Avoid Both: Avoiding an entry in Gold markets can be a sane strategy for those who don't prefer risks at all. But, Gold rates are trading at lows and complete avoidance must have a valid reason.
• Gold is a dud investment, why bother? Gold does not look like the metal it used to be a few years ago. There's no surprise swings. Also,  Government Bonds and IPOs seem to offer better returns. But, Gold is a hedge against inflation. Any personal finance expert will suggest 5-15 percent of your portfolio in Gold. Even Warren Buffett, the man who despised Gold for not giving dividends, invested in a Gold mining company a few quarters ago.

Also Read: Sify Exclusive: Gold has lost all Trigger Points, recovery in six months is grim

This article is informative in nature and should not be construed as an investment offer. Readers are advised to seek the personalized opinion of a SEBI registered financial analyst for better insights.