Scramble For Gold ETFs Amid Surge In Price Of The Metal

On Monday, the price of 24 carat gold inched further up, closer to touching Rs 80,000 for 10 gram from an average of over Rs 77,300 for 10 gram last week, setting a new high just ahead of Diwali and Dhanteras.

Many investors, especially the young, also perceive gold ETFs as instruments to hedge currency risks. They, in fact, are more keen on the electronic form of the metal rather than physical gold — after all storing the metal only adds to the cost and risks of theft.

No wonder, then, that for this Diwali and Dhanteras, Indians, who have traditionally preferred buying the yellow metal in the physical form, are making a beeline for gold ETFs, listed and traded on the National Stock Exchange and Bombay Stock Exchange Ltd. like any other stock.

Gold ETFs are directly linked to the price of the metal. So many of those who have been looking at buying gold for pure investment purposes are now turning to the electronic form, rather than investing and storing the metal. 

At present, there are 17 gold ETFs in India, though as the demand grows, a host of new gold-backed ETFs are set to be launched in the country over the next few years. Just this month, Groww Mutual Fund introduced its gold ETF.

“Gold prices often rise when the rupee weakens, which makes gold ETFs an attractive investment for those looking to protect their wealth,” Dhirendra Kumar, CEO, Value Research told The Secretariat. “As digital investment platforms become more accessible, more retail investors are choosing ETFs for their liquidity, safety and ease of trading,” Kumar said, adding that gold ETF offers a simple and convenient way for investors to gain exposure to gold without the complexities of physical storage.

Another analyst pointed out that the craze for gold ETFs has also risen due to the heightened emphasis on diversification of investment portfolios to reduce risks, amid heightened global tensions. Gold ETFs, considered a smart substitute for the metal, offer a great option for investment diversification, he said.

Global Frenzy For Gold Rising

Demand for gold has steadily risen since the outbreak of the Covid pandemic. Naturally, this is expanding the scope for gold ETFs as well — not just in India but the world over.

The US Federal Reserve’s decision to reduce interest rates by 50 basis points last month also pushed gold prices. The Fed is slated to hold its next meeting on November 6 and 7, amid anticipation of further reduction of interest rates. 

“In this softer cyclical environment, gold stands out as the commodity in which we have the highest confidence in the near-term upside,” Goldman Sachs Research strategists Samantha Dart and Lina Thomas noted in a study. According to the study, released last month, gold prices, which soared to new heights this year, will further increase till early 2025. 

Amid the geopolitical tensions, central banks across the world, especially in emerging markets including India, have increased gold buying.

India's Gold Rush

In India, barring March 2023 and April 2024, gold ETFs registered net inflows since the beginning of 2023. According to data, as of September 30, 2024, Indian gold ETFs had an AUM of more than Rs 39.8 billion, reflecting a 67 per cent rise from a year ago period. So far in 2024, the net inflows into Indian gold ETFs have amounted to Rs 74 billion (US$ 879 million), a substantial increase from Rs 17 billion in the same period last year, WGC data revealed. It added that collectively, these funds have added 10.3 tonnes of gold to the ETF holdings this year, bringing their total gold holdings to 52.6 tonnes, a 29 per cent increase year-on-year.

“Irrespective of whether the prices can sustain at this level or not, the rise in geopolitical and geo-economic uncertainty the world over, especially in the US, China, Eurozone and several other economies, is leading to a weakening of global currencies, and pushing central banks to switch to gold,” said Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank.

The Reserve Bank of India (RBI) is expected to continue with its gold rush drive, an exercise that started since the Covid outbreak. Gold reserves of the central bank are now more than 840 tonnes, up from around 600 tonnes 10 years ago.

RBI Governor Shaktikanta Das earlier had said that the central bank is building its gold reserves. As per data, the RBI has been adding gold almost every month so far this year. Gold ETFs fall under the SEBI regulation for mutual funds, making regular audit of the physical gold bought by fund houses by a statutory auditor mandatory.

Simply put, those looking at the yellow metal as a pure investment option are now switching to gold ETFs — backed by gold bullion and marked by 99.5 per cent purity — for convenience and ease of transaction.

The craze for gold and gold ETFs is expected to continue, as the world tries to tackle multiple challenges. While for investors, gold ETFs provide a smart alternative to holding the physical metal.