Gold ETFs losing sheen despite spike in prices

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Published: August 28, 2019 12:29:10 AM

Market participants also believe that gold ETFs score over other gold products at they are cost effective and liquid.

Data from Bloomberg showed that on Tuesday gold prices closed at Rs 38,404 per 10 gram, down by 0.45% against Monday’s all-time high close at Rs 38,578.

Even as gold prices hit a fresh lifetime high of Rs 40,000 per 10 gram on Monday, gold exchange traded funds (ETFs) have seen investments worth about Rs 70 crore being pulled out in the current financial year so far.

Amid concerns over intensified trade wars between China and the US and an imminent global slowdown, fund managers expect gold prices to remain elevated going forward. In such a scenario, investors ideally should have had exposure to the yellow metal, they say.
In the last few years, investors’ interest in gold ETFs was muted as prices remained flat and other investment categories like equity delivered superior returns.

Over the past one year, gold yielded 28.6% returns, while the Sensex lost about 2.7%.

Chirag Mehta, senior fund manager – Alternative Investments at Quantum Asset Management, says, “I would say that recent rally in gold prices is a fundamental driven rally driven by global slowdown, concerns on trade wars and geopolitical risks. As central banks cut rates and debase currency, gold prices will keep going up because, at the end of the day, gold is a monetary asset. From investors perspective we have always recommended some allocation to gold because it is helpful during such times when uncertainty and volatility is high. Gold is useful instrument in such times and that remains even now.”

Data from Bloomberg showed that on Tuesday gold prices closed at Rs 38,404 per 10 gram, down by 0.45% against Monday’s all-time high close at Rs 38,578.

Separately, data from Association of Mutual Funds in India (Amfi) showed that gold ETFs have seen outflows every year since 2013-14. “Outflows were combination of few things, gold was not giving returns in the last few years and equity were doing well, as returns in gold subsided, outflows in gold ETF started. Unfortunately in India investors usually come after a particular asset is doing well,” added Mehta.

Market participants also believe that gold ETFs score over other gold products at they are cost effective and liquid. Gold ETFs is an open-ended product, which invests in physical gold and attempts to track the domestic spot price of gold. Units of the scheme are listed on stock exchanges and can be easily traded in demat form. Typically, each unit of the scheme is approximately equal to 1 gram of gold.

In terms of taxation, gold ETFs attract short-term capital gains on units held for less than 36 months which will be added to investor’s income and taxed as per the applicable slab rate. While long term capital gains on units held for more than three years will be taxed at 20% after providing for indexation. But now fund managers are hopeful that gold ETFs would see inflows as gold prices go up further. Vishal Jain, Head ETF at Reliance Nippon Life Asset Management, “With surge in gold prices, we are witnessing lot of interest from investors looking for investment in ETFs.”

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