Understanding Sovereign Gold Bond (SGB) Rate Calculation and Its Differences from MCX
The Sovereign Gold Bond (SGB) is a secure and cost-effective way for investors to invest in physical gold, ensuring long-term financial protection and stability. However, understanding the rate calculation process and its differences from the Multi Commodity Exchange (MCX) can be complex for many investors. This article aims to provide clarity on how the SGB rate is determined, its relationship with MCX, and why they differ.
Rate Calculation of SGB
The pricing authority for Sovereign Gold Bonds (SGBs) is the Bombay Bullion Association (BBA), a recognized entity in the Indian bullion market. Due to the secure nature of SGBs, there is no need for investors to worry about discrepancies when selling these bonds. According to BBA, the closing price of gold from three preceding days is averaged to arrive at the price for SGB on any given day. Therefore, while selling SGBs, the rates determined by BBA will be applicable, not the MCX rates.
Post-Issue Rate Calculation
Post-issuance, the rate of Sovereign Gold Bonds (SGB) changes in proportion to the prevailing gold prices, as determined by the BBA. This means that if the gold price fluctuates, the rate of the SGB will also change accordingly. These rate changes are reflected uniformly across various platforms, ensuring consistency and transparency for investors.
Why the Rate Differ from MCX
The gold market in India is highly regulated and there are multiple entities involved in the pricing and trading of gold. While SGBs are priced by the BBA, the MCX (Multi Commodity Exchange) trades gold futures and physical gold, primarily based on daily market dynamics. Consequently, the rates for SGBs, determined by the BBA, and the rates traded in MCX may differ. The BBA sets the benchmark price, while MCX can have different pricing influenced by market supply and demand.
The Role of BBA in Pricing SGBs
The Bombay Bullion Association (BBA) does not only set the benchmark price for SGBs but also ensures that the pricing process is transparent and fair. The association uses a meticulous process to determine the gold price by averaging the closing prices of the previous three trading days. This average price is then used to calculate the rate of the SGB. This method minimizes the impact of sudden market fluctuations and provides a fair market price for investors.
Multiplexity in Indian Gold Market
India's gold market is diverse, with various exchanges, entities, and players. While the BBA is the primary authority for SGBs, MCX plays a significant role in the overall gold trading ecosystem. MCX acts as a platform for trading gold futures, where the price is influenced by short-term investor sentiment and supply-demand dynamics. Therefore, MCX prices may fluctuate more frequently compared to the SGB rate, which is determined by averaging the gold prices over three days.
Conclusion
Understanding the rate calculation for Sovereign Gold Bonds (SGBs) and its differences from MCX is crucial for investors looking to invest in physical gold through this secure bond. The BBA's method of averaging the previous three days' gold prices ensures transparency, stability, and fairness in the rate determination. While the MCX provides a different perspective on gold pricing, its fluctuations do not affect the SGB rate as directly.