Gold Prices Approaching Rs 90,000: Government Halts New Sovereign Gold Bonds—Should You Buy from the Secondary Market?

The SGB scheme, introduced in 2015, offered investors a paper alternative to physical gold, providing benefits such as exemption from making charges, Goods and Services Tax (GST), and wastage costs, along with an annual interest of 2.5% credited semi-annually.

In a significant policy shift, the Indian government has decided to discontinue the issuance of new Sovereign Gold Bonds (SGBs), citing the high cost of borrowing associated with the scheme. Despite allocating Rs 18,500 crore for SGBs in the FY25 Budget—a reduction from Rs 26,852 crore in the interim Budget—no new tranches have been released this fiscal year. Finance Minister Nirmala Sitharaman confirmed this decision during the February 1, 2025 post-Budget media briefing. Economic Affairs Secretary Ajay Seth elaborated that the scheme had become a "high-cost borrowing" method for the government and had not effectively reduced physical gold imports as intended.

The SGB scheme, introduced in 2015, offered investors a paper alternative to physical gold, providing benefits such as exemption from making charges, Goods and Services Tax (GST), and wastage costs, along with an annual interest of 2.5% credited semi-annually. However, with the discontinuation of new issuances, investors are now turning their attention to the secondary market. Currently, SGBs available in the secondary market are trading at a minor discount to the prevailing gold prices, making them an attractive investment option compared to direct gold purchases, especially considering the additional interest income.

For those considering purchasing SGBs from the secondary market, it's advisable to look for bonds trading significantly below their nominal value on stock exchanges like BSE and NSE for better returns. Investors should avoid buying at excessively high premiums and check trading volumes to ensure liquidity. Low trading volumes may necessitate holding the bonds until maturity. Alternatively, Gold ETFs or Gold Mutual Funds offer liquidity and tax efficiency with no GST, unlike physical or digital gold. Additionally, investors can opt for a Systematic Investment Plan (SIP) in Gold Mutual Fund schemes, making gold investment more convenient and accessible for retail investors.

It's important to note that buying deeply discounted older SGBs might not always be beneficial, as they've missed out on gold's recent rally and may indicate underlying liquidity issues with that particular issue. Furthermore, future government gold schemes might offer better terms, making current secondary market investments less attractive. The discontinuation of new SGB issuances might be temporary, and investors should stay informed about potential policy changes.

While SGBs have historically offered a blend of security and returns, the recent policy shifts necessitate reassessing their role in an investment portfolio. Investors are advised to stay informed about market trends and consider their financial goals and risk tolerance in light of these changes.

Disclaimer: This article is for informational purposes only and should not be considered financial or investment advice.