Retail investors are driving a surge in sovereign gold bond prices amid market frenzy

Mumbai: Retail investors are rushing into sovereign gold bonds (SGBs) – a popular government-issued debt instrument denominated in gold – in the secondary market, pushing prices far above gold’s record levels.

Last week, individuals paid premiums of up to 32% above the metal’s spot price amid the sharp rise in prices, sparking the buying frenzy. In the event of a gold sell-off, these investors face the risk of heavy losses.

The SGB 32 February IV series, issued in February 2024 and expiring in February 2032, traded at ₹15,266 on NSE on October 10, a 26% premium over the spot price of gold. On the same day, the SGB December 31 III changed hands at ₹14,556 per gram, a 20% premium. According to IBJA, the spot price of gold that day was ₹12,085 per gram.

Brokers say some retail investors are willing to pay these premiums because they earn annual interest, a zero expense ratio compared to mutual funds, and enjoy tax-free capital gains at maturity, which they say will offset the higher prices. Moreover, the government has stopped issuing new SGBs. “Due to limited supply, impact costs increase if there is a large purchase, causing prices to rise,” said Sandeep Raichura, CEO – retail broking & distribution, PL Capital. He warns that if the current frenzy for gold subsides, exiting the secondary market could become difficult and the premium could disappear, leading to losses.

SGBs have an eight-year term, pay 2.5% annual interest, are tax-free at maturity and incur no storage fees or expense ratios. One unit represents one gram of gold.

“Retail investors have had good experiences with the earlier series of SGBs. With no new issues in the primary markets now, retail investors are being drawn to the secondary markets,” said NS Ramaswamy, head of commodities and CRM at Ventura Securities. Asset managers say investors should do careful math before buying these bonds on the secondary market. They must consider the remaining term, interest yield and premiums before investing. Ramaswamy said the current high premiums are not justified given the fixed maturity and illiquidity of these instruments, warning that the high premiums could erode returns. The increase in demand comes on the back of a 60% rally in gold prices in rupees over the past year. Central banks, especially in emerging markets, have been major buyers of gold to diversify their foreign reserves away from the US dollar. Retail investors have also turned to gold as a hedge amid geopolitical risks and rate-related uncertainty.

Wealth advisors question the value of buying SGBs on the secondary market. “You cannot spread the usage of SIPs, there is no guarantee of liquidity, and since the maximum term is only eight years, you cannot hold them beyond maturity,” says Pranab Uniyal, head of HDFC Tru, the wealth advisory arm of the HDFC group.

Uniyal recommends gold ETFs instead, citing better liquidity and closer price tracking of the underlying metal. Some brokers have also flagged liquidity risks in SGBs, warning that investors may face challenges exiting the secondary market at fair value.