The likelihood of rate cuts in the US as indicated by the Federal Reserve, peaking of the dollar and geopolitical tensions will support gold prices and they feel investors must allocate 10% to the yellow metal.
The third tranche of the SGB in this financial year is available for subscription December 18-22, while the fourth will open in February. Investors will have to pay ₹6,149 per gram of gold after a discount of ₹50 per gram for digital payments. This is ₹276 per gram higher than the price during the second tranche in September 2023 (₹5,873).
Talks of an early rate cut by the Fed has led to a rally in gold prices over the past month with the precious metal gaining 4.2%. Over the last one year, gold has gained 15.92% in rupee terms and 13.88% in US dollars.
Analysts expect gold prices to remain supported in the near term as the US Fed has hinted at an end of the high interest rate cycle and could cut interest rates thrice in 2024.
“Post the Fed’s December announcement, it’s clear that they are concerned about US growth. This is while inflation remains above target with potential to flare up further with the background of US fiscal spending in the run up to US elections next year. Thus, stagflation-like conditions in the US, which are typically conducive for gold, cannot be ruled out,” said Ghazal Jain, fund manager, Quantum Mutual Fund. Ghazal believes a downside for gold is limited given US interest rates and the dollar have now peaked and geopolitical tensions and central bank buying should keep gold prices supported in 2024.
Lower interest rate increases the appeal for gold. Talks of a rate cut in the US have led to a sharp decline in bond yields in the last one month with the US 10-year bond yield down to 3.91% from 4.53%.”Lower interest rates diminish the opportunity cost of holding non-yielding assets like gold, amplifying the precious metal’s appeal,” said Saish Sawant Dessai, an analyst at Angel One. He expects domestic gold prices to move higher towards ₹63,250 per 10 gram from ₹62,500 now.
The union budget for FY24 has made investment in gold through exchange-traded funds less attractive. These gold mutual fund schemes will no longer have benefits of long-term capital gains tax and any gains will be taxed at the marginal tax rate from April 1, 2023. In comparison, capital gains on SGBs are tax free if held to maturity.
“Gold has the potential to give inflation-beating returns over the long term and can be used to meet long-term goals. Buying using SGBs makes it tax efficient,” said Nikhil Gupta, founder, Sage capital.
Hence distributors believe that holding gold as part of long-term portfolios through SGBs is the best bet for long-term investors, as these bonds provide an additional annual interest income of 2.5%, and there are no making charges and storage cost.
SGBs have worked well for investors ever since their launch in November 2015. The first tranche of SGBs in November 2015, bought at Rs 2,684 per gram, were redeemed after completion of eight years on November 30, 2023 at Rs 6,132, giving investors an annualised return of 10.87%.