If you try to time your entry and exits when investing in any asset class, it is very unlikely that you would be able to do so successfully every time. Those who follow price momentum and base their actions on what other investors and market participants feel about the asset class are likely to invite trouble someday.

Now take the example of people who have suddenly become interested in buying gold at this juncture. After recording an all-time high in 2011, gold prices drifted sharply in next 3-4 years. Not many seemed to be interested in buying gold then. However, from the beginning of the Calendar Year (CY) 2016, the gold prices have shot up around 23% in India. The same trend has been observed in the international markets as well.
 

Does gold look attractive?

Data as on July 19, 2016
(Source Ace MF, PersonalFN Research)  

Uncertainty about prospects in China, political problems such as Brexit in the Eurozone, and unclear stance of the Federal Reserve (Fed) in the U.S. in the aftermath of Brexit is keeping global investors optimistic about gold prices. Investors in India seem to be keen on joining the bandwagon as well. As you know, traditionally Indians have been buying gold in physical form, but of late the new avenues are opening up to take exposure to gold. You may buy Gold ETFs (Exchange Traded Funds), or you can invest in Sovereign Gold Bonds.

The Government is about to release the fourth tranche of Sovereign Gold Bonds.

Those who are not aware of what these bonds are, here’s a brief explanation. They are a type of financial instrument that works as a proxy for gold prices in India. The Government issues these bonds through RBI and takes them up on its balance sheet in the form of borrowings. For further details, you may visit this link.

For the fourth tranche, the issue price per gram is set to be Rs 3,119. The first tranche that was launched in November 2015 was offered at Rs 2,684 per gram. The bonds offered in that tranche, trade at around 3%-4% premium to the spot prices in the bullion market at present. Let’s not forget these bonds have an interest component as well, which is built into the prices. In the initial days, the premium was as high as 6%. If you construe this arbitrage as a sure thing, you are likely to go wrong. Gold bonds shouldn’t be bought for listing gains or short term trading, they are essentially for the long term.

Should you invest in the 4th tranche of Sovereign Gold Bonds?
PersonalFN believes, investors should ideally have 10%-15% of their portfolio in gold. Gold is a portfolio diversifier and should be construed as an asset class that helps accelerate returns. Therefore, if you have a long time horizon and have lower than 10%-15% of your portfolio in gold at present, you may subscribe to the 4th tranche of Sovereign Gold Bonds. Just a word of caution, don’t trade in them and hold onto them until maturity to realise its full benefit. At maturity, capital gains made on them are tax-free.

You shouldn’t get swayed by what others feel about a particular investment proposition. Instead of speculating on prices, you should focus on your financial goals and create an asset allocation in line with your goals and risk appetite. These should be the primary considerations for all your investment decisions.

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