Our View on Sovereign Gold Bond

November 14, 15

Our View on Sovereign Gold Bond

Greetings from Hitesh! After reading our view on Market and Gold for 2016 – many readers have asked our view on - Sovereign Gold Bond. So, here it goes. We are dealing with the available information. So, we may change our view if some different information comes to our knowledge tomorrow.

Product details

1.  Only Resident Indian entities including Individuals HUFs, Trusts, Universities, and Charitable institutions can buy these Bonds.

2.  Bonds will offer 2.75% Interest per annum and it will be credited semi-annually in the investor’s account i.e. Every 6 months.

3.  Minimum subscription is 2 Grams and maximum investment is 500 Grams per investor per annum.

4.  Bonds available in Demat and paper forms.

5.  It is mandatory for investors to provide bank account details to facilitate payment of interest /maturity value.

6.  Redemption after 8 years from date of issue with a lock in of 5 years.

7. Issue opens on 5th Nov and closes on 20th Nov 2015.

8.  Issued by Government of India, so 100% secure and it will be Tradeable on Stock Exchange (to keep it TRADEABLE – you need keep it in DEMAT form only

9.  The bond price is around Rs.2680 per GRAM.  On this you will get 2.75% annually. Your interest will be credited to your account every 6 months, as mentioned above.

10.               If the price of GOLD is lesser than your buy price at the time of maturity – you have an option to rollover your GOLD BOND for 3 years more.

11.               You will be paying CAPITAL gains TAX on the GOLD VALUE!! 30% in first 3 years and 20% with indexation from 4^th yeas onwards.

What does this mean?

In the market Gold price is around Rs.26000 per 10 grams now. If you buy now you will get Rs.715 as interest in one year (Rs.357.50 every 6 months). So, after one year assuming gold price do not increase – your gold is worth Rs.26715!!

1.  You are paying Rs.26800 now for 10 units!! 3% more than the current price. So, if you buy now – you will not GAIN anything for the coming one year. In fact, you will have Rs.85 lesser in the next year. ( 26800-26715)

2.  You will have to keep the same in DEMAT form – to keep it tradable on the stock exchange. In other words you will have to incur demat account charges, which is about Rs.750 per annum!! So, your 3% is lost in demat charges (assuming you are buying 10 grams). At the current calculation your loss will be Rs.85 + Rs.750 demat charges – around 4%!!

3. You will make payment for the bonds through CHEQUE or NET BANKING only – so you will need a WHITE capital to buy the GOLD BOND.

4.  You can get the Loan against your GOLD. Now, gold loan are not offered less than 12% and you have to keep margin of 30% to 50%. So, you get loan of Rs.13000 to Rs.18000 against your Rs.26000 worth of GOLD. You get Rs.715 as interest on your GOLD and you pay Rs.2160 (12% on 18000)!!

What is our VIEW?

Gold is bought mainly for two purposes in India - for Jewellery and for Investments.

Jewellery:-

If you have a need for Jewellery in future date – this is not for you, as you can’t convert the units into GOLD. Moreover, selling units will invite the capital gains tax – short term as well as long term.

Investment:-

Indian’s use GOLD as investments mainly because they have some CASH to deploy. For them this is useless as they lack the white capital plus the terms of GOLD schemes are not as attractive as it should be.

When you buy GOLD with CASH – you are doing away with Demat charges / capital gains tax / income tax etc.

What is the WAY OUT?

Government is launching this scheme to divert the GOLD investment into more productive purpose. They want to reduce the import bill. Their intentions are noble but it will not be possible to attract much money into this as most GOLD is bought with CASH in INDIA!!

The Government should declare once in a LIFE TIME TAX indemnity for GOLD buying into GOLD BONDS. They should allow people to buy as much BONDS as they want to buy with CASH. This will save the income TAX for the buyer – 33% gain to start with.

They will be more than happy to bear the demat charges / capital gains tax etc. They would love to hold it for 8 years – if they do not have to pay the income TAX to begin with. What is more – if GOLD price goes down upto 30% in future – they will not PANIC as they have got the TAX benefit of 30% from the day one!!

If the GOVERNMENT doesn’t provide TAX indemnity to CASH buyers, which commands major portion of GOLD buying, this scheme will not be very successful.

Advantages to the BANKS / GOVERNMENT:-

Banks are offering 7.75% on Fixed Deposits for 1 year and above as of now. They are offering 4% to 6% in savings bank account balances. If they get money at 2.75%, which will reduce their interest out go and increase the profitability. They can afford to lend at lower interest and this will also benefit the borrowers.

India is facing terrible liquidity crunch at this moment as the most of the liquidity is stored in CASH(tons cash would have been  paid for 2g / 3g and coal licenses (that’s why they were cancelled.)) These cash have not come to the main channel due to current government’s vigilances and that is one of the reason for LIQUIDITY CRUNCH.

What NEXT?

We had boldly given Nifty Future target of 7750 to our clients when Nifty future was at 8100 in the beginning of this month!! Nifty made low of 7742 on FRIDAY!!

We had also asked to buy 8100 put at Rs.123 and it has touched Rs.358 on FRIDAY!!

Our positional clients are making tons of money by following our calls.

If you also want to make tons of money – we invite you to join us for a TRAIL of 3 months.

Wish you all a VERY PROSPEROUS NEW YEAR.

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Live With Passion…Invest With Passion.

Hitesh Parikh.