One asset class that has gained traction amid this development is gold exchangetraded funds (ETFs). After an outflow of Rs. 395.69 crore in April, gold ETFs have seen consistent inflows: Rs. 827.43 crore in May, Rs. 726.16 crore in June, and Rs. 1,337.35 crore in July (according to Association of Mutual Funds in India) data. The July inflow is the highest since February 2020.
Factors Driving Inflows
One reason for the increased investment in gold ETFs is the absence of sovereign gold bond (SGBs) issuances in the current financial year. According to reports, the government may reduce the issuance of SGBs to Rs. 18,500 crores in FY 2024-25, down from Rs. 29,638 crores mentioned in the interim budget of 2024. Due to the lack of primary issuances, SGBs are trading at a significant premium in the secondary markets, and hence investors are steering clear of them.
In the July 2023 budget, the government reduced the customs duty on gold from 15 per cent to 6 per cent. This reduction lowered gold prices in the market, prompting many investors to purchase gold at cheaper rates.
Sound Prospects Over Three Years
Gold has delivered a high return of 18.6 per cent over the past year. Despite this, experts believe that investors can still enter gold ETFs if they have at least a three-year horizon. One reason is that the interest rate cycle is about to turn. Inflation has significantly decreased from earlier levels. If growth concerns arise, the United States Federal Reserve (US Fed) could cut interest rates as early as September. When bond interest rates fall, the opportunity cost of holding a non-interest-bearing asset like gold decreases, making it more attractive.
An interest rate cut in the US would also weaken the dollar. Since gold is priced in the international market in dollars, a weaker dollar makes gold cheaper for investors from other countries, increasing demand and boosting price.
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