Physical Gold vs Sovereign Gold Bonds vs Gold ETFs: Which Is the Best Investment Option After US Fed Rate Cut?

With the U.S. Federal Reserve cutting interest rates by 25 basis points, gold has once again come into focus for investors seeking safe-haven assets. While gold prices saw a slight dip immediately after the Fed's announcement, many are now weighing the best way to invest in gold-physical gold, Sovereign Gold Bonds (SGBs) or gold ETFs.

Each option has distinct advantages and drawbacks, especially when it comes to returns, liquidity and tax benefits. So, which one makes more sense for investors right now? Let us compare.

Gold Price Outlook After U.S. Federal Reserve Interest Rate Cut

"Gold slipped as the dollar pushed higher, with the Federal Reserve signaling guarded optimism regarding further US rate cuts. Bullion fell by as much as 0.9% as the dollar rose the most since September. A stronger greenback is negative for gold as it's priced in the US currency," stated Bloomberg report.

The Fed trimmed its benchmark interest rate to 4.00‑4.25%, marking its first easing move in months and hinted at two more rate cuts over the remainder of 2025. Gold is likely to maintain its positive momentum over the medium to long term, according to Manav Modi, Analyst, Precious Metal Research at Motilal Oswal Financial Services.

However, he cautioned that after the strong rally seen since the beginning of the year, short-term corrections or dips cannot be ruled out.

"Fed Chair Jerome Powell characterised policy action as a risk-management cut in response to the weakening labour market and said the central bank was in a "meeting-by-meeting situation" regarding the rate outlook. Dot plot showed that there was no change in rate cut probability in 2026 and 2027 while, growth forecast was also increased keeping the market on the edge regarding the monetary policy ahead. On data front, number of Americans filing new applications for unemployment benefits fell last week, data showed, but the labour market has softened as demand for and supply of workers have diminished," said Mr Modi.

"Meanwhile, gold exports from Switzerland to China jumped 254% in August compared with July. As Fed cut its rates after eight months pause, BOE and PBoC kept their interest rates unchanged in recent announcement. No major data points are scheduled on the economic calendar from the US," he added further.

According to the Motilal Oswal Financial Services Ltd. (MOFSL)'s latest Gold Quarterly and Commodity Insights report, gold has delivered over 30% year-to-date (YTD) returns, largely driven by a mix of geopolitical tensions, ongoing tariff wars and strong inflows into gold ETFs.

Motilal Oswal Recommends 'Buy on Dips' Strategy for Gold

While central bank purchases and physical demand have shown signs of slowing due to elevated prices, investment sentiment remains firmly positive. MOFSL maintains a "buy on dips" strategy, projecting domestic gold price targets between Rs 1,13,000 and Rs 1,20,000 and COMEX gold targets between $3,800 and $4,000, assuming the USD/INR exchange rate holds around 88.

Physical Gold vs Sovereign Gold Bond vs Gold ETF: Which One Is Better To Invest Now?

Investors can choose from several options including physical gold, gold exchange-traded funds (ETFs), and sovereign gold bonds (SGBs). Each of these carries its own benefits and limitations.

Physical Gold remains popular for its tangible value and cultural significance, particularly in India. However, it involves storage risks and making charges, which may impact overall returns.

Gold ETFs, on the other hand, provide a digital route to invest in gold with high liquidity. They track international gold prices and can be traded like stocks on exchanges. These are ideal for short- to medium-term investors who value flexibility and transparency.

Sovereign Gold Bonds (SGBs) offer a unique edge, they provide a fixed annual interest of 2.5% and are tax-free if held until maturity. These bonds are issued by the RBI and backed by the government, making them a secure investment option.

How Should You Invest in Gold?

According to Angel One's Prathamesh Mallya, SGBs stand out due to their tax benefits and guaranteed interest. However, with no recent SGB issuances, investors may need to look at secondary market options, where liquidity can be lower.

Experts believe the choice between ETFs and physical gold depends on the investor's risk appetite and investment goals. For those looking for ease of trading and quick entry/exit, ETFs are an attractive choice. Meanwhile, those with long-term horizons and lower liquidity needs may prefer SGBs for their superior tax efficiency and fixed interest returns.

Taxation Considerations While Buying Gold

Tax treatment is an important factor in selecting a gold investment mode. Gains from SGBs are fully exempt from capital gains tax if held till maturity. However, if sold in the secondary market before maturity, they are taxed as long-term capital gains after three years.

Physical gold and gold ETFs attract short-term capital gains tax if sold within 36 months, and long-term capital gains tax (with indexation benefit) if held longer. ETFs also carry expense ratios, which slightly reduce the overall returns.

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