Gold ETFs in limelight. Should you invest?

Jimmy new

As you may know, India is the second-largest consumer of gold. By tradition and culture, in India, gold has always been looked at as eternal wealth and is symbolic of Goddess Lakshmi.

Besides, in the heart of billions of Indians, gold has always carried high emotional value, as it is passed down to family generations and strengthens bonds.

Gold is also considered to be a safe haven or a store of value in times of economic uncertainties.

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For these reasons, most Indians have a deep affinity for gold and consciously purchase it in various forms – gold bars, coins, jewellery, etc. particularly during festive times and wedding season. But of late, some are also been investing in gold the smart way through gold ETFs.

Graph 1: Gold ETFs gaining the attention of Indians

Data as of September 2019
(Source: Amfi)

Although the net assets managed by twelve gold ETFs were lower at Rs 5,613 crore in September 2019 compared to Rs 5,799 crore in August, the net inflows remained positive to the tune of Rs 44 crore in September 2019 as per the data released by the Association of Mutual Funds in India (Amfi).

Since September 2018, the AUM of Gold ETF has reported an increase of good +26.6%. This shows that even amid elevated gold prices, some investors are parking their hard-earned money in gold, and rightly so.

Graph 2: The sheen displayed by gold in the long run

Data as on October 18, 2019
(Source: MCX)

The long-term uptrend exhibited by the precious yellow, of course, has been a reason for gold ETFs to gain traction; but, with it, the underlying factors such as the following are proving supportive, such as…

  • Uncertainty looming in many parts of the world and global growth forecast is sharply lowered by the IMF (to 3.0% for 2019 ––the lowest since 2008-90). IMF’s Chief, Ms Kristalina Georgieva has warned that the global economy is in the midst of a “synchronised slowdown”, and the effect will be pronounced in countries such as India.

(Image source: IMF’s World Economic Outlook)

  • A slowdown in global trade growth (lowest since the last ten years), signals a possible recession.
  • A Weak consumer demand along plus the cost pressures and not-so-efficient transmission of policy rates are impacting earnings of most companies, and as a result, the volatility is heightened in the equity markets.
  • Investment growth is frail, particularly in developed economies.
  • Trade war tensions continue between the US and the other economies.
  • Delay in Brexit, has led to the drop in the value of the Pound.
  • Geopolitical tensions are evident.
  • There is an upside risk to inflation, emanating particularly from food and fuel prices.
  • And the central banks across the world are taking accommodative and easy monetary policy stance to support growth.

Table: How is the world approaching Gold ETFs?

Region Name

Total AUM (bn)

Holdings (tonnes)

Flows (tonnes)

Flows (US$ mn)

Flows (%AUM)
North America 69.0 1,445.1 62.1 3,068.0 4.4
Europe 59.4 1,243.1 7.7 586.1 1.0
Asia 4.0 84.6 3.9 186.6 4.6
Other 1.7 35.0 1.5 71.1 4.3
Total 134.1 2,807.8 75.2 3,911.8 2.9

Data as of September 2019
(Source: World Gold Council)

In many parts of the world as well, gold ETFs are witnessing positive participation. The World Gold Council (WGC) has observed that the holdings have surpassed late 2012 levels, at which time the gold price was near US$ 1,700 per ounce, 18% higher than current levels.

The WGC is of the view that the positive catalysts will remain going forward as well ––particularly due to the financial market uncertainty.

Should investors in India continue to buy Gold ETF?
Yes, in the midst of heightened global uncertainty and headwinds in play, where the Indian markets are largely expected to be coupled, it makes good sense for IFAs to recommend gold ETF to their clients/investors’.

Here are five benefits of Gold ETF:

  1. You don’t have to dole out a premium – Unlike physical gold, where an investor would pay for making charges additionally; Gold ETFs are purchased and sold at the underlying prevailing market price of gold. All the investor needs is a demat and trading account.
  2. Convenience – Since Gold ETF is traded on the stock exchange, it can be easily bought and sold at the market value. Plus, in the absence of physical delivery, they are easy to hold. The investor’s gold ETF holdings are safe in your demat account until they are sold.
  3. Low cost – Gold ETFs, since they are held in demat form, have a lower relative holding cost than buying physical gold.
  4. Quality – A Gold ETF is backed gold of 0.995 fineness. Further, the gold is stored in secured vaults and also insured.
  5. Resale value: Since Gold ETFs are traded at their prevailing market price, as regards to the resale value, the investor doesn’t have to worry. The units can be easily sold at the prevailing market price during the trading hours of the exchange.

How much to allocate to gold?

IFAs may allocate around 10-15% of their client’s/investor’s entire portfolio to gold through a Gold ETF with a long-term investment horizon.

Gold will play its role of an effective portfolio diversifier, a store of value during economic uncertainty, and a shield against inflation in the long run.

This will be a smart and sensible investment strategy in the long run.