Many people think that gold and bonds are in eternal competition as asset classes. But they are wrong, as evidenced by the Sovereign Gold Bonds (SGBs). They are government securities denominated in grams of gold. The SGBs were launched by the government of India in November 2015, under the Gold Monetisation Scheme. The authorities wanted to turn physical gold lying ‘idle’ in Indian households into a productive asset and reduce country’s dependability on gold imports.

Sovereign Gold Bonds and (Physical) Gold

The SGBs are interesting substitutes for holding physical gold. Although investors have to have to pay the issue price in cash and the bonds will be redeemed in cash on maturity, investors are assured of the market value of gold at the time of maturity. So, investors do not have get physical gold to participate in any growth (or a fall) in the price of gold expressed in Indian Rupees. The investment thus eliminates risk and storage costs. Additionally, the bonds bear interest at the rate of 2.50 percent per annum (paid semi-annually), so they give you an extra yield. Also, the SGBs can be used as collateral for loans, and they are exempted from the capital gains tax on redemption.

Of course, the SGBs do not have only benefits, but also some drawbacks. First of all, by investing in SGBs, one will not get physical gold, but paper gold. It might be an advantage for some investors, as it removes all the costs of handling bullion. But it also creates counterparty or credit risk. However, the SGBs are government securities, so they are quite safe. But you never know. The issue is whether you trust the India’s government. Another shortcoming is limited liquidity and the lack of full control. One can sell the physical gold almost immediately. But the bond’s maturity period is for 8 years and investors cannot exit the bond until the 5th year.

We hope you enjoyed the above definition. We encourage you to learn more about the gold market – not only about the comparison between the sovereign gold bonds and the physical gold, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!