Golden Opportunities

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Golden Opportunities
Himali Patel - 02 September 2020

Consider this, despite a dwindling global demand, gold-backed Exchange Traded Funds (ETFs) broke all records, emerging as a safe haven during crisis.

For the month of July 2020, the Indian Gold ETFs recorded a massive net inflow of `921.19 crore against the `494.23 crore in June, registering a stellar growth of 86 per cent shows the data by Association of Mutual Funds in India (AMFI). This year so far, Gold ETF category has received a net inflow of `4,451.9 crore. (See the table: Gold ETF)

The World Gold Council (WGC), in its July report had stated that the first half (H1) of world gold demand was down by 6 per cent at 2,076 tonnes (t). Interestingly despite the global demand being down, the inflows into Gold ETFs recorded a breaking 734t. indicating the H1 inflows have even surpassed the 2009 annual record of 646t.

So, what factors led to this trend where massive inflow in Gold ETF in mutual fund category was seen, given the low demand for gold? And will Gold ETF continue to grow? Let’s take a look:

A Gold ETF is a commodity-based Mutual Fund (MF) that mainly tracks the price of asset like physical domestic gold. Gold ETF units represent the physical gold in dematerialised paper form. In India, Gold ETF represents 99.5 per cent purity assurance of physical gold bars. The capital gains from sale of Gold ETFs are taxed at par with physical gold at 20 per cent.

“A Gold ETF is passively managed and closely tracks domestic gold prices derived from London Bullion Market Association. The performance of the scheme may differ from that of the underlying gold due to tracking error,” says Manish Banthia, Senior Fund Manager - Fixed Income, ICICI Prudential AMC.

Today the Gold ETFs are devoid of the ills that plague physical gold such as lack of standardisation and transparency.

“Gold ETFs are standardised, traded on an exchange platform, thereby bringing together a diversity of buyers and sellers in one place making it liquid and allowing price discovery. In a sense, Gold ETFs address the problem of fragmented physical markets,” says Vishal Jain, Head-Nippon India ETF, Nippon India Mutual Fund.

According to WGC, COVID-19 was the main influence on the gold market in Q2, that led to severely curtailing consumer demand after lockdown, while providing support for investment in the form of Gold ETF’s. “The global response to the pandemic by central banks and governments, in the form of rate cuts and massive liquidity injections, fuelled record flows of 734t into gold-backed ETFs (gold ETFs),” says the report.

Gold has always been considered a safe haven during economic distress and has a low correlation with most other asset classes, thereby providing investors with portfolio diversification. “Given the uncertain conditions on account of the pandemic, a lockdown in physical markets, these ETFs became the most natural avenue for investors to take cover,” concurs Jain.

Financial investors tend to focus on asset classes that have done well in the recent past. Experts call it a ‘recency bias’. And it is not limited to gold. Equity, bonds, real estate or gold, whichever asset class performs, gets a lot of focus. Gaurav Rastogi, Founder & CEO of Kuvera.in, believes the same is happening with gold and thus an increase in interest in ETFs. The gold returns have a low correlation to equity returns especially during wars, market crash, and other disasters. This is what makes gold an effective portfolio diversifier.

“In the past 29 years of data, the correlation of monthly gold returns and monthly Nifty50 returns is just 0.3 per cent. Gold ETFs have issues of liquidity, they can trade at significant premium and discount to the underlying due to supply demand mechanics,” explains Rastogi.

Quantum Mutual Fund research points out that Gold ETFs have received record inflows in 2020, greater than any previous full year. This also indicates that gold remains an under owned asset.

“Today the biggest indicator of under-ownership of the metal is that global allocation to gold stands at only 2.5 per cent, a figure far-flung from the ideal allocation of 10-15 per cent. This means that even a small uptick in portfolio allocation to the asset class could translate into significant price appreciation for gold in the time to come, this includes Gold ETFs as well,” points out Chirag Mehta, Sr. Fund Manager-Alternative Investments, Quantum Mutual Fund.

The current gold prices scale new highs on the back of weakness in the US Dollar, tension between US and China. Rise in COVID-19 cases globally, boost its safe-haven appeal. Investors continue to hedge their exposure to riskier assets by investing a portion of their assets in gold.

For the month of July, retail inflation, which is measured by Consumer Price Index (CPI), climbed to 6.93 per cent from 6.23 per cent of June data. As per the value research, returns from gold commodity schemes under mutual fund category for last 3 months, 1 year (Absolute return), and 3 years (Annualised return) have been 12.12 per cent, 34.22 per cent and 20.31 per cent respectively as on August 13, 2020.

Given the high inflation rate, Gold ETF clearly has become an excellent choice of investment for investors who are looking to beat inflation. Whether it is for consumption or for investment, one thing is for sure that demand for Gold ETF is going to see an upswing.


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