Is it a good idea to invest in sovereign gold bonds?
Sovereign Gold Bonds are sovereign bonds issued by private companies that are intended to provide investors with a safe, tax-free way of preserving their savings. These tax free bonds have been purchased by government officials around the world for decades. The U.S. government reportedly sold around $10 billion worth of these bonds in 2008, and it continues to be a popular investment today.
One of the major benefits of investing in gold bonds is that although they are not taxable you don’t need to worry about yield or other risks associated with other investments due to their safety and cash flow assurance.
How Sovereign Gold Bonds Work
For many years, governments, banks, and wealthy families have used gold as a savings program. Gold is typically viewed as a safe investment that, unlike paper currency and other assets, does not lose its value over time. Today, gold bonds are issued by private companies that allow individuals to invest in the value of gold without actually purchasing the metal itself. Sovereign gold bonds are issued by private financial institutions such as banks and investment trusts that are backed by the government. The U.S., for example, sold nearly $10 billion worth of these bonds in 2008 to raise funds for its deficit. Sovereign gold bonds are also reportedly popular with foreign governments. Canada, for example, sold almost $19 billion in sovereign gold bonds in 2008 and has raised over $250 billion since 2003.
The economies of some countries are backed by their currency but others such as the U.S., Canada, England, and Australia have used gold as a basis to support their economies and they have also sold sovereign gold bonds to investors who wish to preserve purchasing power in their savings accounts. These bank-issued bonds usually pay a percentage based on the value of the metal or cash flow guaranteed by these nations.
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Some investors claim that sovereign gold bonds are better than other investments because they can provide additional benefits outside of just an inflation-stabilizing investment. For example, bonds may help individuals diversify their portfolios and provide a hedge against recession or inflation.
How to Invest in Sovereign Gold Bonds?
To invest in sovereign gold bonds, you need to open an account with the issuing bank that will offer you information regarding interest rates, redemption schedule, and the minimum investment amount. While gold bonds can be liquidated quickly, investors should note that usually paying a penalty is associated with early redemptions. This is because many of these bonds are issued for more than one year. Certain banks may also require investors to purchase their sovereign gold bond above a certain value.
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Investors should also be aware that interest can fluctuate over time as the value of the sovereign gold bond is linked to the value of gold. Likewise, investors may need to pay a higher rate of interest on some bonds if they are issued in foreign currencies instead of their domestic currency. These bonds are considered safe because they are backed by their respective governments and they typically will not default, even in the event that these governments choose to reduce these bonds’ value. Investors who provide liquidity to these bonds are also held liable for any losses.
So, there it is. A sovereign gold bond is a bond issued by a government to raise money for various projects. These bonds do not attract income tax, and investors can redeem them after a certain period of time. However, redemption before that time may be accompanied by penalties and other charges. There are many banks that issue these bonds to investors as an alternative investment to gold coins, bars, or bullion. Some view such bonds as a good way to invest in gold; others argue that they are too volatile for buying the yellow metal for eventual resale at higher prices.
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