In January, gold exchange-traded funds (ETFs) witnessed a net inflow of Rs 200 crore, the highest infusion in seven years, as per data from the Association of Mutual Funds in India.
Does this mean that Indians are now interested in digital mediums of buying the precious metal?
To provide a wider picture, in January 2020, assets managed by the 11 funds selling the securities rose to Rs 62 billion rupees. While this is 31 percent higher than the asset allocation seen in the same month a year ago, it is just a little above half the Rs 120 billion record touched in January 2013, a Bloomberg report showed.
Meanwhile, gold consumption in India fell by 9 percent in 2019 according to the World Gold Council. Purchases of gold bars and coins declined by 10 percent in the country and global holdings of gold ETFs increased by 401.1 tonnes last year compared to a 76.2-tonne increase in 2018. Additionally, a Bloomberg report citing a source said that gold imports halved in January.
The data goes to show that while there is a definite increase in allocation to digital gold over physical gold, the value of the gold, which rose 18 percent year-on-year, the highest since 2013, is also what caused the increase in the value of the "asset allocation."
Some possible reasons for improved demand for gold ETFs among Indian investors:
1. Uncertainty in the global and Indian markets
In 2019, the US-China trade war took some ugly turns with tit-for-tat tariffs and several protective trade policies were by the Trump administration on its partner countries that also affected India's exports to the US. There was also Brexit uncertainty in Europe and Hong-Kong riots in Asia.
While these geopolitical conflicts have been resolved towards the end of December, the beginning of 2020 saw an unexpected attack on an Iranian leader at the orders of American president Trump. As tensions in the Middle East eased, the coronavirus outbreak in China that has already killed over 1,800 people has been a looming threat to economic activity in the world.
The global economy continues to face concerns of slowdown, even if temporary.
In India some macro indicators have started showing indications of recovery in the economy, however, worries of inflation effects have mushroomed.
2. Volatility in equity markets
In 2018, LTCG was re-introduced on equity investments, reducing its appeal. Businesses in India have also been facing a credit crunch in the last couple of years, and stock market participants have been sceptical, after the IL&FS episode.
Volatility in equity markets in India and globally is beneficial for the yellow metal, a safe haven asset, as the demand for risky assets lowers.
Experts suggest about 10 percent of total financial portfolio allocation in gold, to diversify investment and curb risks.
Increasingly aware investors have been placing money in ETFs, a highly liquid asset when compared to physical gold.
4. Ease of purchase
The demand for gold jewellery, in the last few years, has been restricted to customary or traditional purchases and not for investment.
Buying gold ETF is cheaper, convenient and can be bought in smaller denominations, considering the existing high price-level of the metal. It only requires a demat account and a gadget with an internet connection. Opening a demat account has also been simplified with the Aadhaar-based KYC procedure.
An investor can easily sell it without losing on making charges or wastage seen in the physical gold. One can purchase ETFs over the same application they use to purchase stocks.
Unlike physical gold, ETFs can be bought and sold at the best market price available to the investor, to capitalise from the fluctuations in price of the metal, without worrying about theft and purity.
5. Outlook on gold
Since 2019, amid increasing concerns over a slowdown in the global economy, especially China, the outlook on gold has been positive. In fact, experts expect the uptrend to continue as geopolitical risks like the upcoming US presidential polls and spread of coronavirus persist.
At the end of December 2019, Commtrendz Research Director Gnanasekar Thiagarajan told PTI that gold price level could rise to Rs 44,500-45,000 per 10 grams, if new developments denting risk appetite arise in the global front.
Central banks around the world are also expected to maintain their accommodative stance on monetary policies this year, which is also likely to benefit gold.