Gold ETF Inflows Jumped! Here’s Why…
Sep 05, 2019

Author: Aditi Murkute

(Image source: Image by Linda Hamilton from Pixabay)

Gold prices continued its ascent, most notably reaching all-time highs in many currencies, including the Indian rupee, Australian and Canadian dollar, British pound, and Japanese yen.

The World Gold Council (WGC) data reveals that central banks across the world are chasing gold, particularly, the banks in the developed economies, not taking any risk in times of heightened global uncertainty. Even developing ones such as Russia, China, and India are accumulating gold. Currently, India holds 6.6% (or 618 tonnes) of its overall foreign exchange reserves in gold.

Graph 1: Ascending Gold prices across the globe

Ascending Gold prices across the globe
(Source: World Gold Council)

At the same time, positioning through futures net longs in COMEX remained above 850t throughout the month of July, while global gold trade volumes averaged $166bn a day - almost 50% above their 2018 levels.

Table 1: Geographical spread

Geographical spread
(YTD data as on 31 July 2019)
(Source: World Gold Council)

In India, the gold demand was 1,123t in Q2, up 8% y-o-y. H1 demand jumped to a three-year high of 2,181.7t, largely due to record-breaking central bank purchases.

In Q2 2019, the net purchases of central banks summed 224.4 tonnes (t), a 47% increases year-on-year. And as a result, total net purchases by the central banks in the first six months of the calendar year 2019 rose to 374.1t, reporting a 57% increase year-on-year.

The gold prices in India had soared up to almost touch the 40k mark per 10 grams. A sharp fall in the Indian Rupee's value against the US dollar has pushed the gold prices up further.

This rallying up is due to a lot of factors that have made gold investment popular lately. The continued geopolitical instability of US-China Trade war, global trade escalating tensions, woes of economic slowdown, the US Federal Reserve interest rate cut that happened in July for the first time since a decade, the spike in import duty in July, dovish commentary on monetary policy from central banks, and the rallying gold price in June were the main factors driving inflows into the sector.

As per the world gold council report, there are two significant factors to influence Indian gold demand over the long run. Rising income is the most powerful factor that has a positive effect and higher gold prices have a negative effect. Over a short-term period, gold demand is spurred on by inflation, rises with a good monsoon, and subsequently dampened by higher import taxes and other restrictive measures.

Image: Factors influencing Gold demand

Factors influencing Gold demand
(Source: World Gold Council)

The WGC report also states that weaker economic growth and the possible impact of higher gold price volatility may result in softer consumer demand this year, especially in emerging markets that make up the lion share of annual demand.

Speaking specifically of India (the second-largest consumer of gold), gold investment is mainly through retailing in the form of jewellery, gold coins, and bars. Gold demand is hinged on the progress of the Southwest monsoon. Currently, the floods in some parts of the country have had a destructive impact on the sowing of Kharif crops which could further push the prices high This is because nearly two-thirds of India's gold demand comes from rural areas, which depend on agriculture as a source of livelihood.

Watch this video: Can Gold Make Money with the World Sleepwalking into a Global Crisis

As per the WGC data for the month of June,

A strong recovery in India's jewellery market pushed demand in Q2 up 12% to 168.8t. A busy wedding season and healthy festival sales boosted demand before the June price rise brought it to a virtual standstill. India's growth drove modest improvement in the global jewellery total, up 2% y-o-y, to 531.7t. 

Bar and coin investment in Q2 sank 12% to 218.6t. Combined with the soft Q1 number, this took the H1 total to a six-year low of 476.9t. A 29% y-o-y drop in China accounted for much of the global Q2 decline.

Graph 2: Gold demand in India

Gold demand in India
(Source: Gold demand trends)

A busy wedding season and healthy festival sales boosted demand before the June price rise brought it to a virtual standstill. India's growth drove modest improvement in the global jewellery total, up 2% y-o-y, to 531.7t. 

Even the IMF Global Financial Stability report highlights an increase in the level of risk among multiple global metrics, and therefore, the importance of owning gold in one's portfolio.

As per the AMFI data, there has been a surge in the number of folios and asset under management (AUM) of gold ETFs as well. From April 2019 until July 2019, number of folios has grown by 6.1% and the AUM has grown by 10.6 % in the same period.

Graph 3: Growth momentum of ETFs

Growth momentum of ETFs
(Data as on July 31, 2019)
Note: No of folios on the LHS in and the AUM (Rs in crore) on the RHS
(Source: AMFI)

Gold is one of the prime asset classes, a mark of wealth. And in India, physical gold has always been and is stored in the households. It is an asset class that can be used during troubled times in lieu of cash. It serves as a hedge during financial crisis.

Hence, even central banks from across the globe did buy tonnes of gold as a reserve management system to deal better with any financial upheaval.

[Read: Here's Why You Should Be Stacking Up Gold as Central Banks Do...]

Traditionally, an investor would think of purchasing the physical gold, but at the current pricing, buying physical gold is expensive and the trend of rising in pricing will probably continue. According to WGC, India's demand may soften in the September quarter on account of higher prices, rural distress, and hike in customs duty. The upcoming festive season and wedding muhurtas may offer some boost to gold demand--particularly in the grey market-- and in turn, prices per 10 grams would stay elevated.

So, in times like these, what you should do is...

[Read:  Here's Why You Should Allocate Some Portion to Gold ETFs In 2019]

Do buy gold strategically in a paper form, as it can prove to be more effective. Be a smart investor to allocate at least 5-10% of your entire investment portfolio to gold and holding it with a long-term investment horizon will prove to be sensible and a smart investment strategy.

As amidst the heightened global uncertainty and headwinds in play, gold will play its role of an effective portfolio diversifier, a store of value during economic uncertainty, safe haven, and a shield against inflation in the long run.

Avoid a speculative approach while investing in gold, instead, invest in gold the smart way through gold Exchange Traded Funds (ETFs) or gold savings funds as you can actually tangibly hold gold without facing any storage problems or worry about theft.

[Read: 4 Smart Ways to Invest in Gold]

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