After lackluster performance in 2022, gold has regained its shine amongst investors as economic uncertainty triggers safe haven demand. Gold Exchange Traded Funds (ETFs) have seen strong net inflows of late as investors seek to hedge inflation and market risks through gold exposure.
Return of Volatility in Global Markets
With most major economies expected to enter recession in 2023-24, volatility has returned to global equity and bond markets:
- US markets endured steep losses in January 2024, triggering fears of prolonged slowdown
- Rising yields dampened appetites for high-growth tech stocks through January
- Indian markets also witnessed high volatility around Union Budget 2024 announcements
- Continued geopolitical tensions between Russia-Ukraine, China-Taiwan and Middle East conflicts persisting as risks
These unstable conditions have led investors to diversify into gold as a stable asset class relatively detached from business cycles.
Robust Inflows into Gold ETFs
As safe haven demand grows, the Gold ETF category has seen strong inflows since December 2023:
Key Highlights
- In 2023, gold ETFs in India attracted ₹2000+ crores, highest since 2012
- Gold ETF assets under management (AUM) hit new high of ₹19,750 crores in January
- SBI Gold ETF and Aditya Birla Sun Life saw highest monthly inflows in years
- Around 9 tonnes of gold were accumulated into ETFs in last 2 months
Experts believe this marks a reversal of years of net outflows as gold’s appeal was overshadowed by high-returning equity assets.
Renewed Interest in Gold
There are a few key factors driving investors towards gold ETFs currently:
Inflation Hedge
- Rising inflation globally increase gold’s attractiveness as a stable store of value
Market Uncertainty
- Equity/debt volatility has enhanced diversification value of gold
Geopolitical Tensions
- Global conflicts and trade frictions make gold reliable fallback asset
Rupee Depreciation
- Weaker rupee makes gold cheaper for domestic investors to accumulate
Gold ETFs also score over physical gold on convenience, transparency and ease of transactions through online platforms.
Response from Fund Houses
With rising appetite for gold ETFs, Indian mutual funds are gearing up through:
- Launching new fund offers with lower charges to attract retail investors
- Improving liquidity to reduce bid-ask spreads on units
- Investing in technology for efficient tracking of underlying gold prices
- Undertaking promotional campaigns on gold’s portfolio suitability
- Tapping rising demand in smaller towns through digital channels
The Road Ahead for Gold ETFs
Most analysts expect gold ETF inflows to continue at healthy levels due to supportive macros:
Dovish Monetary Policy
Slower rate hikes by Federal Reserve and RBI to boost gold
Economic Recession Fears
Persisting uncertainty to sustain safe-haven appeal
Volatile Oil Prices
Higher crude inflation lifts gold’s hedge value
Festive, Wedding Demand
Gold demand to rise seasonally during H1 2024
However, unexpected equity market rallies may temporarily dampen inflows. Overall, gold ETFs look set for a bright 2024 as key portfolio stabilizer.
Key Gold ETF Metrics (January 2024)
| Parameter | Value | Change YOY |
| Total Gold ETF AUM | ₹19,750 crores | +35% |
| Monthly Inflows | ~₹650 crores | +55% |
| No. of Folios | 35 lakhs | +15% |
| Gold Holdings | 920 tonnes | +7% |
Gold ETFs are regaining favor as Twin Deficits (fiscal and current account deficits) weigh on Indian economy coupled with global headwinds. For nervous investors, gold provides an efficient tool to diversify and secure wealth from ongoing unpredictability.
- Global gold ETF holdings also seeing uptick: Holdings by gold-backed ETFs globally stood at 120 million ounces in January 2024, rising for three consecutive months as per World Gold Council data
- Central bank buying at 55-year highs: As per World Gold Council, central banks bought almost 1,136 tonnes of gold in 2022, highest since 1967 and more than 50% above the 10-year average
- Jewelry demand may take a hit: Commodity experts warn that rising gold investment demand is crowding out consumption for jewelry which may fall 10-15% in 2024
- Supply growth restricted: Newer gold mines are taking longer and proving more expensive to develop limiting production growth.
