Tag: Treasury Bill

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Why Are Gold Prices Falling After Touching A Record High last September?

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In September 2020, gold prices touched a record high of Rs 58,000 per 10 gram. In times of crisis and uncertainty, people tend to buy more gold as it is a risk-haven and comparatively less volatile. There were many reasons why gold prices hit record highs in 2020. The US-China Trade War, negative US bond yield, geopolitical tensions, and uncertainty around the COVID-19 pandemic to name a few. 

Fast-forward to a few months later, gold prices have come down significantly to a 10 month low. As of 6th April 2020, gold is trading close to Rs 45,500 per 10-gram level, which is around Rs 13,000 less than the record high of Rs 58,000. The way the gold prices were soaring, a correction was definitely expected but there is much more to it. There are some economic factors, market factors, and other global factors that have come into play. 

Reason 1: Investors Have More Risk Appetite

During the COVID-19 lockdown, businesses were shut, unemployment was high, global economies were down, households did not have money to spend and had to depend on government support for expenses.

Once things were a little better, governments all across the world release stimulus packages. Central banks across the world reduced interest rates to put money into the system. Loans were offered at low-interest rates and moratoriums were given on NPAs. All of a sudden, markets were flooded with liquidity.

Gold, on one hand, is a risk haven. People invest in gold during times of uncertainty, since gold is globally accepted and can be sold during times of crisis.  When there is too much money in people’s hands, they are likely to invest it in more risky assets. The stock market is one of them. The global stock markets managed to touch record highs. NIFTY and SENSEX touched their record highs as well.

Reason 2: Dollar Zooming 

For the past few years, gold and the US Dollar have had an inverse relationship. The current increase in the US dollar with respect to other global currencies has caused gold prices to decrease. This is because if the US dollar becomes stronger, gold will become relatively more expensive in other currencies causing demand to reduce and therefore the price. Conversely, if the US dollar gets weaker, gold becomes relatively cheaper to buy in other currencies, and the demand increases, and therefore the price. However, it must be noted that gold and the US dollar CAN move together in some cases. 

Reason 3: Rising Bond Yield

In August 2020, the US 10-Year bond yield was ~0.52%. The yield has now risen threefold to ~1.6% in March 2020. When bonds return a higher yield, the cost of holding gold becomes higher. Investors will prefer holding stocks and bonds over gold, as these would give a better return than gold. Investors will start diluting their gold holdings and start pouring that money into the bond and stock market. This will cause gold prices to decline.

Reason 4: India cuts custom duty from 12.5% to 7.5%

In the 2021 Budget Session, the import duties on gold were slashed from earlier 12% to 7.5%. An additional 2.5% cess was proposed in the form of Agricultural and Infrastructure Development Cess(AIDC). After the announcement, gold futures on MCX slumped 3% or about ₹1,500 per 10 gram.

The decrease in gold prices has seen a lot of accumulation happening which helped in price recovery. Prices are up by almost Rs 2000-Rs 2500 from the low of Rs. 45,500 per 10 gm. The second wave of COVID-19, rising lockdown measures, uncertainties over vaccines, rising debt, and liquidity are supporting factors of gold price rise. A question remains, should you invest in bonds over gold? The US 10-year bond yield has been at its peak recently, bond prices are low, yields are high. One can either choose to profit from the volatility of the gold market or choose to invest in a rather consistent instrument like bonds. Investors should watch out for inflation numbers, long-term bond yields, US Fed Reserve Rate, and other global factors that might affect the spot price of gold. 

So the next time you see a family member wondering why gold prices are moving like it is, you will know the answer!

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Editorial

NSE allows trading of T-bills, state bonds

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NSE (National Stock Exchange) introduced trading in Treasury bills (T-bills) and State Development Loans (SDLs) in its capital market segment. In line with equity trading, investors can now buy and sell T-bills and SDLs through NSE trading members.

Most importantly, the move comes within a week of SEBI chairman Ajay Tyagi urging financial market participants to handhold those who have recently opened Demat accounts. They need to begin with investing in less-risky government securities before moving on to equities and other risky instruments, he said.

In order to understand what are Treasury bills and SDLs, kindly go through our next segment.

Treasury Bill

Firstly, treasury bills are used for short term borrowing by the Central Government to fund projects like building roads, schools etc. Furthermore, they are issued at three maturity periods–91 days, 182 days and 364 days. There is no interest component in the case of treasury bill, which is the main difference between a government bond and a treasury bill.

In other words, the bill is issued at a discount to its true value (which is higher than the discounted price) and at maturity the investor is given the true value of the bill. This is a simple case of buying low and selling high. It can be further explained through an example.

Let’s say, a 91-day treasury bill with a face value (true value) of Rs. 120 can be bought at a discounted price of Rs. 118.40. Upon maturity, the investor is eligible to receive the entire true value of Rs. 120, which allows them to realise a profit of Rs. 1.60. 

As per the regulations put forward by the RBI, a minimum of Rs. 25,000 has to be invested by individuals willing to invest in a short term treasury bill. Furthermore, any higher investment has to be made in multiples of Rs. 25,000.

From an investor’s point of view, a treasury bill is an extremely safe investment option as it is issued by RBI and backed by the Central Government. So even during an economic crisis, the true value has to be paid to the investor upon maturity. In addition, they are highly liquid that means the true value will be deposited into the investor’s account a day after the maturity.

The current 91-day treasury bill yield is 3.22 per cent, in other words if the treasury bill would have been a government bond then its yearly interest rate will be 3.22 per cent.

State Development Loan (SDL)

State Development Loans (SDLs) are dated securities issued by states for meeting their borrowings requirements. Purpose of issuing State Development Loans is to meet the needs of state governments.

Lets first understand what is a dated security.

Dated Government securities are long term bonds of the government that carries a fixed interest rate. These are issued to fund state projects for rural and urban development

The key difference between SDL and Treasury Bill is that SDLs are long term investments having maturity periods up to 30 years and treasury bill has a maximum maturity period of a year.

The average interest (coupon) rate of a state development loan is around 8 per cent.

From an investor’s point of view, SDL is very safe government security for long term investment.

“Availability of a secondary market for these securities would encourage participation in the primary markets. Now all the major government securities including G-sec, SDL and T-bills are offered at NSE in both primary and secondary market platforms,” NSE Managing Director and CEO Vikram Limaye, said.

In conclusion, the availability of these securities in the capital market segment for trading, coupled with NSE’s wide reach, is likely to improve the participation of retail investors in this asset class.