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Gold ETFs came back on investors’ radar in April, but will investors continue buying them?

The actions of Indian mutual fund investors are in line with their global counterparts. Gold’s strong price performance and rising uncertainty in the financial markets arising from both geopolitical tensions and recession fears made investors look at the yellow metal.

May 12, 2022 / 11:32 AM IST

A swift upward move in gold prices attracted the attention of many investors in April. According to monthly data shared by Association of Mutual Funds in India (AMFI), gold exchange-traded funds (ETFs) saw net inflows of Rs 1,100 crore in the month. The last time such four-digit inflows in gold ETFs was seen was in February 2020.

Investors shop gold

Gold prices moved up after the war broke between Russia and Ukraine, hitting a high of Rs 53,367 per 10 g on April 18. The strong price performance and rising uncertainty in the financial markets arising out of geopolitical tensions, increased volatility caused by rising interest rates and fear of a blow to economic growth made investors look to the yellow metal, a traditional safe haven investment.

The actions of Indian mutual fund investors are in line with that of their global counterparts. As per demand trends data shared by World Gold Council, in the first quarter of CY2022, globally gold ETFs had their strongest quarterly inflows since Q3CY20, fuelled by safe-haven demand. Holdings jumped by 269 tonnes, more than reversing the 174-tonne annual net outflow from CY21.

Investors buy gold ETFs, as prices surge


“Rise in uncertainty across the globe is a key factor why investors are looking at gold. Increase in interest rates should make the equity markets volatile and pull down the returns expectations, which in turn push investors into considering allocating to gold as a hedge,” says Anup Bhaiya, founder and managing director, Money Honey Financial Services.

Demand for gold ETFs has also gone up because there is no public issue of sovereign gold bond in this financial year.

Weak rupee and the gold demand

For most Indians, gold is not just a safe haven asset. It is also a protection against a weak currency. As interest rates in the US are hiked, capital flows from emerging markets to the US. This weakens emerging market currencies against the dollar. The rupee is not different. From 73.79 per dollar on January 12, 2022, it has depreciated to 77.26. When the rupee weakens, gold prices go up, other things remaining the same, as gold the world over is priced in dollar terms.

Despite a correction in gold prices in dollar terms, gold prices in rupee terms have not fallen much, thanks to a weak domestic currency. Gold quotes at Rs 50,821, down 4.77 percent from the high of Rs 53,367 it registered on April 18.

Will investors continue loving gold?

Gold has been volatile over the last couple of years. Though weakening gold prices may act as a dampener for some investors looking for some quick returns, past returns have been a key influencer for many investors.

“Investors look at gold when there is volatility and uncertainty. If the equity markets remain volatile, we will see increased demand for gold as an asset class. If the volatility goes down, then investors may simply ignore gold,” says Bhaiya. He advises investors to regularly allocate 5-10 percent of their money to gold.

Gold has to be seen as a means to contain downside in the portfolio. It may not be a return-generating asset. The rally in gold prices in the first few months of this year may not go too far, says experts.

Anuj Gupta, vice-president, research, commodity and currency, IIFL Securities, expects gold to remain range-bound. “Initially, when the interest rates are hiked by central banks, gold may see some downside as low as Rs 48,000 per 10 g. But over a couple of years, gold should go as high as Rs 56,000 to Rs 57,000 per 10 g.”

“With increasing challenges to the global economy and increased volatility in equity markets, we expect to see good investor interest in gold and this may keep prices supported,” says Ravindra Rao, vice-president and head, commodity research, Kotak Securities. However, this is also the year the US Federal Reserve and other central banks have started to normalise their interest rate to bring inflation under control. Given these diverging factors, we expect to see a modest 5-7 percent return in the next one year.” He foresees gold averaging near the Rs 54,000 per 10 g price mark, compared to Rs 50,750 on the MCX.

Most experts say investors should allocate money to gold ETF and SGBs or sovereign gold bonds gradually if they are underinvested in the yellow metal, which should help the portfolio in trying times.

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Moneycontrol PF Team
first published: May 12, 2022 07:35 am
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