While gold prices continue their upward climb, sovereign gold bonds remain the most tax-efficient instrument to accumulate the precious metal, says Anindya Banerjee, head of research, Currency and Commodity, Kotak Securities, in an interview with Saikat Neogi.
How should one invest in gold to earn higher tax-efficient returns in the long run?
Gold has shown impressive capital appreciation, boasting a compound annual growth rate (CAGR) of 17.5% over the last five years, starting from Akshay Tritiya on May 7, 2019. Since April 22, 2023 (Akshay Tritiya), gold prices have risen by 18%. With a positive medium-term outlook, these gains could potentially be enhanced by interest payments if investors opt for sovereign gold bonds (SGBs) as these offer an additional 2.5% per annum interest payable semi-annually. Investors can also enjoy tax-free returns by investing in SGBs. SGBs eliminate the risks and costs associated with storage and provide freedom from issues such as making charges and purity concerns that come with gold in jewellery form.
These bonds have an 8-year maturity period, with exit options becoming available from the fifth year onward. If held until maturity, SGBs are exempt from capital gains tax. However, investors forfeit tax benefits and have to pay capital gains tax if they sell the bonds on the secondary market.
Given the run-up in prices, should individual investors consider some profit-booking to rebalance portfolio allocations?
Given the recent decline in prices from the peaks reached in April, and with a positive outlook in the medium term, it may not be necessary to do a significant portfolio rebalancing at this juncture. However, pullback in gold prices to around `68,000 per 10 grams could offer a favourable opportunity to accumulate the precious metal.
Ideally, what percentage of the portfolio should be allocated to gold?
Taking into account the dynamic gold market and investment landscape, strategic portfolio allocation becomes all the more important. Ideally, conservative investors should allocate around 5% of their portfolio to gold, while aggressive investors may opt for 10% allocation.
What is the outlook for the metal in the medium term?
Gold captivated the attention of investors worldwide and put up an impressive rally in 2024 thanks to bets of Fed rate cuts, robust Chinese demand and sharp rise in speculative buying. Escalating geopolitical tensions added to the allure of gold, further bolstering its safe haven appeal. Despite the impressive performance of equity markets, gold surpassed major indices, leveraging both the anticipation of a Fed pivot and concerns regarding geopolitical instability. To provide context, India’s broadest index, the Nifty 500, saw gains of around 7%, and the S&P 500 rose by 9% on a year-to-date basis, while MCX gold prices are trading 13% higher.
Currently, markets see a 65% chance of a Fed rate cut in September, as per CME’s FedWatch Tool. Considering that wagers of a second rate cut in the November or December meeting are also building up, we expect gold prices to see a positive trend in the medium term. Having said that, unfavourable price swings triggered by wavering expectations on Fed’s first rate cut and developments in the Israel-Gaza situation cannot be ruled out. Hence, we see MCX Gold moving in a range of `66,000-80,000 per 10 grams over the next one year.
