Difference Between Sovereign Gold Bonds and Physical Gold? (2024)

Gold, since time immemorial, has been one of the most coveted possessions in India. From being a symbol of royalty to being an award for a good deed done by the common man in the pages of history, from being a mode of exchange to being an offering to The Almighty in places of worship or a being a gift for loved ones; gold in its various physical forms have always been the most prized asset, reward or offer for many in India. It has also been used as a means to tide over financial emergencies for families for centuries. So customarily, possession of gold has been a strong symbol of the financial support system in India till date. Traditionally, Gold investment has also been extremely prevalent in the Indian subcontinent.

The options of owning gold:

Today there are many ways in which people own gold. It is available in both physical forms and as paper too. It can be bought in its physical forms of jewellery, coins, bars and artefacts. Paper Gold on the other hand is available in the form of Sovereign Gold Bonds (SGB), Exchange Traded Funds (ETF) and Gold Mutual funds that invest in ETFs.

If the question is to choose the option(s) that is the safest, yet liquid and will also give returns, then one needs to ideally choose between Sovereign Gold Bonds and Gold in its physical forms. Let’s take a dive into both the instruments to understand them better.

Investing in Sovereign Gold Bonds (SGBs):

SGB is a form of investment in gold that can be purchased in paper form. Unlike other forms of paper gold, one does not need to have a demat account to purchase SGBs. However if one wishes to trade the SGBs on an exchange, then they would need to have their holdings of SGBs in demat accounts, else the secondary market operations cannot be performed.

SGBs are issued by RBI in consultation with the Centre. Periodic windows are opened, typically every 2 to 3 months and remain open for a week or so, for investors to buy the bonds at the issue price per gram of gold. In case the investors look forward to off period purchases, they need to buy the bonds from the secondary market at its market value.

Pros of investing in SGBs over physical Gold:

1. Term of bond:
The bonds are issued for a term of 8 years with an assured interest rate of 2.5% disbursed bi-annually. However premature redemption at ongoing market prices can be done for investors who look for early liquidation.

2. A safe bet for an investor:
Unlike physical gold, SGBs are a safe investment option as it is dematerialised and, it is devoid of risks of loss involved in hazards of safekeeping or storing of gold, issues around making charges of jewellery and purity of gold purchased.

3. Risk of price loss minimal:
SGBs can be purchased at a price very close to the actual market value of gold as it is devoid of making charges applicable to purchase of gold jewellery or assessment of its purity.

4. Anyone can buy SGBs: In any fiscal year, the maximum denominations of purchase of SGBs are as follows (with minimum denomination allowed being 1 gm) –

• • Individuals – 4kgs
  • HUF – 4kgs
  • Trust – 20kgs

However, investors can purchase gold at their freewill based on their financial capacity.

5. Gain on online purchase:
For an investor, an online purchase of SGB is cheaper as it costs INR 50 less per gram compared to its otherwise nominal value.

6. Loan against SGBs:
SGBs are accepted as collateral by most lending organisations/ institutions. RBI’s stipulated ‘loan to value’ ratios holds good and is the same as that applicable for a loan against gold.

7. Tax gain:
Taxation norms are in favour of SGBs as capital gains are exempted from tax, whereas the same gains from gold are taxable in the hands of the investor.

Cons of investing in SGBs over physical Gold:

1. Less liquidity:
SGBs have lesser liquidity compared with physical gold. They have 5 years lock-in-period from their coupon payment dates. Trading in the secondary market is possible only post that. Moreover, the redemption process involves 1 day lag between application and credit of the redemption amount in the bank account.

2. Volatilityinvolved:
There will always be a risk of making a loss in the invested capital in SGBs if the gold price falls. However, the total units of gold that one has invested in, remains intact.

3. Redemption blues:
In case of SGBs, the investor may suffer a slight loss in the gold price in the bonds at the time of redemption at maturity, owing to the process involved in arriving at the closing price- that involves averaging of the price of 24ct gold over the last 3 business days before redemption.

Investing in Physical Gold:

Gold in its physical form on the other hand can be purchased in the form of jewellery, coins, bars and artefacts. Gold coins of 24 karat purity and 999 fineness are available in denominations of 5 and 10gms. Gold bars are generally of 20gms. These can be easily bought over the counters from jewellery shops across the country. Some of the jewellers also make jewellery available online for sale and are delivered to the doorsteps as well. Online platforms like Amazon, Flipkart, Snapdeal among others also have gold coins and gold bars for sale online and it is referred to as ‘Digital Gold’. An array of payment options like cash, cheque, card payments, digital modes like net banking, Paytm, G-Pay, etc. are available to the buyers and that makes an anytime gold purchase easy these days.

Pros of investing in physical Gold over SGBs:

1. Ease of purchase:
   Gold jewellery, coins and bars are generally readily available over the counter at jewellery stores, banks and online platforms depending on the kind of purchase one is looking for.
2. Triple benefit of Gold:
   If one is looking for an investment that is safe, beats inflation and gives returns (that hedges inflation) and is highly liquid, then gold definitely gains an edge over SGBs.
3. The resilience of Gold:
   Price of gold is inversely related to those of equity market investments. For instance, if the equity market is on a high; gold being a debt market instrument, the price of gold is likely to go down. However, when the debt market bounces back, the price of gold has historically risen with stronger momentum, thus hedging inflation overall and acting as a buffer to investments against market volatility.
4. Ease of sell:
   In its physical form, it can be easily liquidated and sold in the market as and when needed to meet financial exigencies, without any time lag against cash. This is not possible in case of SGBs.

Cons of investing in physical Gold over SGBs:

1. Difficult to store:
   Gold being high-value metal is risky to keep at home. Thus storage and safekeeping of the asset is always a challenge as there is always a risk of theft. Bank lockers to store gold are available but they come at a price. Moreover understanding the purity of the metal and ‘making charges’ involved in jewellery purchase always calls for a premium charge for owning this precious metal. ‘Making charges’ of gold can vary from 6% to 14% of the price of gold and can go up to as high as 26% for special intricate designs. This is not the case with SGBs and it can be purchased at a cost close to the real price of gold.
2. Gold loss in exchange for outdated jewellery:
   Designs of gold jewellery may be viewed as outdated in the eyes of changing generations and their tastes. However, the growing price of gold at INR 51,600 (10gms) as on 20 December 2020, may keep new purchases out of reach for many. Thus leading to dissatisfaction among people. The loss of gold and value in the process of exchange is separate.
3. Does not earn interest:
   Gold is not viewed as an investment in most households in India. People attach emotions and sentiment to gold and do not look at selling it for profits. Moreover, it cannot be referred to as a passive investment tool as it does not earn any interest but can earn an income only when liquidated in the open market.
4. Loss in distress sale:
   Though gold is liquid and can act as financial support, as distress sale in times of equity market Bull Run, may prove costly to the seller.

Thus whether to invest in Gold or Sovereign Gold Bonds depends on the objective of the investment or purchase of a financial instrument and the time frame for which one can stay invested in the chosen tool.