Last year, sometime in September, gold became bold scaling a new high and Assets Under Management (AUM) of gold Exchange Traded Funds (ETFs) too soared. But having witnessed a correction in gold price soon thereafter, AUM of gold ETFs after depicting resilience for few months began to witness a fall.

During the six months period from May 2013 to October 2013 while gold prices have once again ascended, AUMs of gold ETFs are diminishing as investors seem to be dumping gold (by redeeming units of gold ETFs).
 

AUMs of Gold ETFs vs. Gold Prices

Data as on October 31, 2013.
Note: Average gold prices for each respective month have been taken
(Source: AMFI, PersonalFN Research)  

As per the data available with the Association of Mutual Funds in India (AMFI), AUMs of gold ETFs have fallen to Rs 9,894 crore in October 2013 from its uttermost level of Rs 12,057 crore in January 2013; resulting in depletion of -17.9%.

Why such a fall in AUMs of gold ETFs?
Well, since gold prices have once again neared their all-time high, investors seems to be wary and therefore seem to be booking profits after having invested in the earlier corrective phase of the precious yellow metal.

So should you be actually selling gold now?
Confirmation from incoming U.S. Federal Reserve chief, Ms Janet Yellen that the central bank's loose monetary policy was here to stay, has signalled that the current pace of stimulus (vide bond-buying worth U.S. $85 billion per month) may not be tapered in the near term. Such a move would be supportive for gold; at least until the current pace of U.S. bond buying programme is maintained, and more so when macroeconomic variables yet look dismal in the U.S.

Likewise with the Euro zone crisis not over yet (due to situation of debt-overhang persisting) and the European Central Bank (ECB) haven reduced rates to a new low to 0.25% (and ready to reduce further if needed) to aid the ailing economy, the sheen for the precious yellow metal is not lost yet and in fact seems to be getting brighter in the long-term with uncertainty prevailing.

For India too, slowdown in economic growth, inflation, concern of fiscal deficit and chances of rating downgrade, are downbeat macroeconomic variables which will encourage smart investors to look at gold as a hedge and an effective portfolio diversifier. Also having witnessed above normal monsoon this year, rural demand for gold could stoke up, as it means more cash in the hands of farmers who often invest mainly in two asset classes gold and land. Supply side constraints are also likely to instil premium of gold prices in India. In such a scenario, smuggling activity may resurrect (due to hike in custom duty) recognising the fact that India has an insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons. It is noteworthy that according to the World Gold Council (WCG), gold demand in India could reach a record 1,000 tonnes this year as consumers buy for the festival and wedding season.

PersonalFN thinks that in the backdrop of the downbeat economic variables and global economic headwinds, smart investors would view gold as a monetary asset rather than mere commodity; and that would keep the long-term trend for gold intact until economic uncertainties recede. At PersonalFN, we believe that, you should consider your investment time horizon and accordingly allocate 10% to 15% of your total portfolio towards gold (via gold ETFs). Gold is not an instrument to make quick money but a solid long term asset and hence you should ideally invest in gold with a longer investment horizon.

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