Traditionally, Indians are known to buy and hold investments in physical gold for years, even generations. Gold has been seen as a store of value and inflation hedge. But when it comes to Gold Exchange Traded Funds (ETFs) or demat gold, it seems to be a different story. Indians appear to view investments in physical gold and gold ETFs differently.
Over the last 3 years (December 2013 to November 2016), Gold ETFs have witnessed outflows in almost every month with the cumulatively outflow being around Rs 3,000 crores. Due to the correction in gold prices globally and domestically over the last 5 years, the performance of Gold ETFs during this period has been negative and appears to be driving the trend of outflows.
On the other hand, the Indian equity market has performed well since 2014 accompanied by strong inflows from domestic investors, possibly an indication that investors have shifted assets from Gold ETFs to equity.
During this period, investors globally have been increasing their holdings in Gold ETFs with net flows to the tune of $12 billion on the back of continuation in expansionary monetary policies by key central banks including the ECB, Japan, US Federal Reserve and geo-political uncertainty in various parts of the world (Brexit, etc). November witnessed an outflow of around $4.7 billion on rising expectations of a rate hike by the Fed in December, which were met, accompanied by indications of more hikes to come in 2017.
Gold has traditionally been viewed as a safe-haven asset. In other words, during periods of significant distress or uncertainty in financial markets, gold attracts investors and performs well. In recent history, gold outperformed other asset classes during the global financial crisis in 2008 and the subsequent recovery period up to 2011. In the aftermath of the Tech bubble burst in 1999-2000 and the subsequent global economic slowdown as well, gold outperformed equity. In the Indian context, gold also acts as a currency hedge; appreciating in value when there is a fall in the rupee vis-à-vis the USD (the domestic price of gold is based on the international or USD gold price, excluding domestic taxes).
Over long time periods equity tends to outperform gold but it plays an important role in an investment portfolio due to its negative to low correlation (as illustrated above) with traditional asset classes like equity and debt, thereby reducing fluctuations or volatility in the portfolio particularly during periods of significant uncertainty in financial markets or the economy.
- Allocation to gold can be maintained at 5% to 10% of an investment portfolio.
- Gold ETFs due to various benefits like ease of holding, better liquidity, pricing transparency, etc. can be considered as an alternative to holding physical gold.
Gold and Equity: Performance
Gold and Equity: Growth of Rs 1 lakh in the Sensex and Gold since January 1997
A version of this article initially appeared in the Afternoon Despatch & Courier.
