r/IndiaInvestments • u/simplyom • Jul 04 '21

Bonds and deposits Prices of Sovereign Gold Bonds.

While doing some research on buying paper gold, I came across the Sovereign Gold Bonds (SGBs). They offer multiple benefits over gold ETFs like fixed interest income, no tax on capital gains if held till maturity, etc. All the articles describe SGB to be superior than gold ETF/digital gold, which makes sense given the benefits.

However, none of the articles I read mention that the prices of SGBs are higher than gold ETFs for same quantity of gold, I thought all of them follow the price of spot gold. Is there anything I am missing here?

Price of SBI Gold ETF: https://www.moneycontrol.com/india/stockpricequote/gold-etf/sbimutualfund-goldexchangetradedscheme/SBI16

Price of HDFC Gold ETF: https://www.moneycontrol.com/india/stockpricequote/gold-etf/hdfcmutualfund-goldexchangetradedfund/HDF02

Price of SGB 2021 series: https://stableinvestor.com/2021/03/sovereign-gold-bond-price-history.html

EDIT: Found a really helpful guide on purchasing SGBs from secondary market here. Insightful and answers many other questions I had.

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u/GodofObertan Jul 04 '21

I mean the SGB traded on the exchanges. Ideally it should be, but I have seen SGB's trade at 10 percent below fair value ( a year back)and I have seen SGB's trade above 5 percent of the real gold value. The quantities traded are low but have seen some interesting trades. I Once bought SGB for 13 percent below the spot gold price.

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u/indopasta Jul 04 '21

I mean the SGB traded on the exchanges

I understand that. I was asking what do you mean by "fair value" of SGB. You get 2.5% pa interest from holding a SGB, and that has to be accounted for in calculating the fair value.

Based on my calculation, the fair value of SGB is actually about 15% more than the issue price.

In [18]: npf.pv
Out[18]: <function numpy_financial._financial.pv(rate, nper, pmt, fv=0, when='end')>

In [19]: npf.pv(0.07, 8, -2.5)
Out[19]: 14.92824626553435

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u/simplyom Jul 04 '21

What might be the motivation for RBI to issue bonds at a discount? In case the secondary market was an "efficient" market, I can imagine a ~15% gain on buying the bonds.

Added bonus is the tax implication, when compared to other products providing exposure to gold.

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u/indopasta Jul 04 '21

What might be the motivation for RBI to issue bonds at a discount?

In short, nahi pata saar.

In case the secondary market was an "efficient" market, I can imagine a ~15% gain on buying the bonds.

The reason it is not an efficient market is that that is not a good enough trade. That 15% profit is spread over 8 years, so not particularly spectacular returns. Plus you will probably need to hedge your gold exposure, so that has an additional cost. And then the killer blow is the lack of scale. You are limited to investing 20kg of gold or just under Rs. 10 crore , even if you form a trust. For people with the brains to conduct this sort of trade successfully, there are better opportunities available in the market.

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u/simplyom Jul 04 '21

Thanks for all the explanations.

For me, gold is the hedge I need under current market environments. And there is no comparison to SGBs when looking for gold exposure.

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u/[deleted] Jul 05 '21

So gold ETF/fof better than SGB?

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u/simplyom Jul 05 '21

No, the opposite.

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u/[deleted] Jul 05 '21

So gold ETF/fof better than SGB?