Should you buy sovereign gold bonds from secondary market?

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NEW DELHI: The fourth issue of sovereign gold bond 21-22 has opened for subscription on Monday. The issue has been priced at 4,807 per unit while there is a discount of 50 for those purchasing online.

The current issue price of gold bond is calculated based on the average price of the last three business days of the week preceding the issue week. The price of gold of 999 purity is taken as declared by Indian Bullion Jewellers Association. Every issue of gold bond must be listed on the stock exchange within 15 days of the closing of the issue.

However, if you compare the price of the previously listed bonds with the current gold price, you will see some of the bonds are trading at a discount ranging between 1% and 3% while it may go up or down depending on the demand for the gold bonds. Apart from the demand, gold bonds are thinly traded, and the discounts are basically the cost of providing liquidity or exit to the seller.

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“Sovereign gold bonds of previous issues are trading at a discount in the secondary market because of the downward trend being witnessed in gold prices,” said Sugandha Sachdeva, vice president, commodity and currency research, Religare Broking Ltd.

“At present, gold prices are almost 14 percent down from their record highs, marked in early August 2020 amid the overall ‘risk-on’ sentiments in the global as well as domestic markets, which have dimmed the lure of safe haven asset-gold,” added Sachdeva.

Buying gold bonds from the secondary market

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Buying gold bonds from the secondary market is a good idea as you don’t have to wait for the issue to open and can spread your investments in a staggered manner. Also, you may get the bond at a discounted price. However, the discount may not be very high.

“The discount factor in the secondary markets provides another advantage as the trading volumes are quite thin. In case gold prices fall below their issue price, one can buy the same at a cheaper rate from the secondary markets and keep the average purchase price low. Also, the investor gets an option to exit position in tits and bits as and when required as compared to the lock-in period of 5 years for redemption applicable for the primary issue,” said Sachdeva.

However, to buy gold bond from secondary market, you will need a demat account and liquidity could be challenging. You may not be able to buy large quantities if you would want to. Also, one should be mindful of the taxation while buying and selling gold bonds from the secondary market. The capital gains on maturity are tax-free while in case you sell the bonds on exchange, gains will be taxed at the rate of 10% with indexation after three years of holding while if bonds are sold before three years, the gains will be added to the income of the investor and taxed as per the slab rate of the investor.

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