Understanding the impact of liquidity on sovereign gold bond (SGB) prices
09-Mar-2023 •Ashish Menon
I have GOI Series III SGB 2.50 27/12. Gold rates have increased but this gold bond is showing a loss. Why so? - Anonymous.
Sovereign gold bonds (SGBs) are a popular investment option for individuals who want to invest in gold without owning physical gold. These bonds are issued in denominations of 1 gram of gold and multiples.
Impact of liquidity on sovereign gold bond prices
The price of sovereign gold bonds is directly related to the price of gold. As the price of gold fluctuates, the price of the bond changes accordingly. However, the price of the bond is also affected by liquidity in the secondary market, leading to trading at a premium or discount. Bonds that are in high demand but have limited supply trade at a premium, while those with high supply and limited demand trade at a discount.
Opportunities for investors created by premium and discount pricing
Investors who hold these bonds till maturity can earn returns based on the change in gold price and the interest earned on these bonds. However, if investors wish to sell their bonds in the secondary market, they may find that the bonds are trading at a premium or discount. For example, even when the price of gold goes up, the price of the bond may remain the same or even decrease. This creates an opportunity for investors to purchase bonds trading at a discount and earn higher returns than those who purchased the bonds at the time of issue. Conversely, bonds trading at a premium may not be as attractive for investors.
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If an investor is holding a bond trading at a discount, it may be best to hold onto the bond until maturity to benefit from the rise in gold price. If an investor wants to sell their bond, they should do so only when it is trading at par or at a premium.
While the price of SGBs is directly related to the price of gold, liquidity in the secondary market can also impact the bond's price. Investors can take advantage of opportunities created by the premium and discount pricing in the secondary market. However, investors should only sell their bonds when they are trading at par or at a premium to maximise their returns.
Where to buy sovereign gold bonds?
How is the interest on SGBs paid?