Why the Gold ETF is witnessing higher inflows and what’s driving the gold prices up.

The story

Gold Exchange-Traded Funds (ETFs) in India attracted ₹4181 crores in the July-September quarter, a 261% Quarter-on-Quarter increase from ₹1158 crores in the April-June quarter.

Globally, gold ETFs have seen five consecutive months of inflows, with September recording US$1.4 billion. Let’s decode what’s fueling this growth. But before that, let’s quickly understand what is an exchange-traded fund (ETF).

What is an ETF?

Consider it a mutual fund but trading on an exchange (BSE and NSE) like a stock. When you invest in mutual funds, you get its units while in ETF, you buy those units from an exchange.

So if you buy a gold ETF, you’re investing in a fund that is holding a gold, on your behalf.

And why anyone would buy a gold ETF? Well, no making charges and no GST on purchases. No need to worry about storage. The fund will buy the gold on your behalf and keep it in a safe locker. While buying or selling physical gold, you need to go to some jewellery shop. Here, you just need to place a buy/sell order from your stock broking app.

Long story short, you get all the benefits of gold minus the inconvenience.

As of today, gold price in India has crossed ₹78000 mark, hitting an all-time high. What’s driving the gold prices?

Why gold is in focus?

1. Heavy Demand From Central Bank

Central banks bought 483 tonnes of gold in the first half of 2024, including 43 tonnes by the RBI. This increased demand is fueling the rise in gold prices.

2. Interest Rate Cut

Central banks around the world are cutting interest rates, making money more accessible. An increased supply of money reduces the currency’s value. So gold becomes more attractive during such scenarios.

3. Safe-Haven Demand

Rising geopolitical tensions, especially in the Middle East, have driven investors to seek safety in gold, which acts as a safety net during the economic crisis.

All these factors have resulted in higher gold prices. In the past four years, the price of gold has doubled.

How Gold ETFs have performed in India?

Two of the oldest gold ETFs in India are Nippon Gold ETF and UTI Gold ETF, launched in March 2007. Since then, they have delivered 11.56% and 11.67% annual returns respectively.

To conclude

Gold ETFs are gaining popularity because of their convenience, cost-efficiency, and the rising appeal of gold as a safe-haven asset amid global uncertainties. In India specifically, as there is no news of the new Sovereign Gold Bond (SGB) issue, investors are turning to second best option to invest in gold, i.e. Gold ETF.