Why in news?
Fourth tranche of sovereign gold bonds 2020-21 are opened for subscription.
What are gold bonds?
- The government introduced the gold bonds scheme in 2015.
- The scheme was introduced to wean away investors from the physical gold market.
- These bonds have a maturity period of eight years.
- But, the investors have the option to exit after the fifth year.
- Funds raised through such issuances form part of the government’s overall borrowings in a year.
What are the benefits of buying gold bonds?
- Gold bonds offer investors twin benefits of price appreciation along with a fixed 2.5% coupon per year.
- Interest earned on these gold bonds is added to the holders’ income.
- Interest earned on these bonds is taxed according to their slab rate.
- Any capital gains on these bonds at maturity are tax free.
- This makes them far more attractive than owning physical gold.
- To offer greater liquidity, the bonds are listed on stock exchanges within a fortnight of issuance, and can be traded.
- Gold bonds appear attractive when gold prices spike.
- This leads to greater investor interest in this asset class.
Why are gold prices rising globally?
- Much before Covid-19’s impact led to a crash in global stock markets, gold prices had started their upward glide.
- The global spread of Covid-19 has raised concerns on global growth over the last three or four months.
- Negative growth rates and fears of a global recession have pushed central banks and big investors to take shelter in gold.
- There is nearly 40% crash in benchmark equity indices in the US between February and March 2020.
- This has forced the US Federal Reserve to announce a record liquidity injection and bond-buying programme of more than $3 trillion.
Why prices are rising in India?
- Since India mostly imports gold, the depreciation of rupee with regard to dollar makes gold costlier in India.
- Domestic factors such as concerns over the country’s fiscal health and a higher demand for gold also pushes up prices.
- In India, the RBI has cut policy rates by 115 basis points over the last three months, and brought down the repo rate to 4%.
- [Repo rate - The rate at which the RBI lends to commercial banks]
- The RBI has also announced liquidity injection in the economy.
- Any expansion in the paper currency tends to push up gold prices.
Will gold prices continue to rise?
- Gold is an efficient tool to hedge against inflation and economic uncertainties.
- It is also more liquid when compared with real estate and many debt instruments.
- Generally, after any major economic crash and recession, gold prices continue their upward run.
- Market analysts feel that gold could overtake its previous peak of around $1,900 per ounce in the global market.
Can one invest in gold at the current price point?
- In India, there is a sharp decline in interest rates over the last year alongside high volatility in the equity markets.
- This has brought investors’ focus towards gold.
- A cut in interest rates by the RBI has led to a decline in interest rates on small savings and term deposit rates of banks.
- SBI is currently offering an interest of 2.7% on savings bank deposits, and 5.4% on 5-10 year term deposits.
- Experts say that it makes good sense for investors to invest in gold.
Can the price of gold crash?
- Given the economic uncertainty, gold would touch a new all-time high.
- In India, prices will be supported by any further weakness in rupee.
- Key events that could stall the rise of gold are,
- Sudden sale of gold holdings by central banks to tide over the economic crisis,
- Crisis in other risk assets prompting investors to compensate their losses through sale of gold ETFs (Exchange Traded funds).
Source: The Indian Express
