Investments in gold ETFs may continue to grow despite 13% fall in yellow metal prices from record high

Sun Nov 29 2020

Recent trends indicate that gold ETFs have become a favoured investment option among investors, despite consumer demand for jewellery having slowed down. According to the World Gold Council (WGC) data, gold demand in India fell 30 percent, year-on-year, between July to September. Jewellery demand in India between July to September fell 48 percent, year-on-year, to 52.8 tonnes, from around 101.6 tonnes, a year earlier. However, at the same time, the demand for gold, as an investment, rose 52 percent, to 33.8 tonnes, on a year-on-year basis. These trends are indicating that Indian investors are shifting away from traditional jewellery to gold ETFs.

The investor base in gold ETFs has increased, after seeing phenomenal growth in gold prices in the last one year.

Gold prices, which were trading near Rs 38,000 per 10 grams in November 2019, have rallied to new lifetime highs of Rs 56,191 per 10 grams in August 2020, and are currently trading near Rs 48,700 per 10 grams, which is still 28 percent higher from a year ago.

The number of Folios (or the total investor base) in Gold ETFs, rose from 3.77 lakh in October 2019, to 7.82 lakh in October 2020. During the same period, the Assets under Management (AUM) rose by Rs 8,317 crore, or 147 percent, from Rs 5,652 crore, to Rs 13,969 crore.

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Despite the recent drop in gold prices from Rs 56,191 to Rs 48,700, there is a huge possibility that investments in gold ETFs will continue to grow, as these instruments provide a better long term investment opportunity, as compared to gold bullion/jewellery. Indians traditionally have favoured gold jewellery, bars, or coins; however, changing trends is a signal regarding which way the consumers are moving. ETFs are held in demat form, which takes into account the safety aspect. Further, the cost of acquisition in gold ETFs is very low, as there are no making charges and other related expenses. Investment in gold ETFs is also preferred, as there is enough liquidity to exit and enter smoothly, and people can start investing through the Systematic Investment Plan (SIP) mode, which is as low as Rs 1,000 per month. A few fund houses even offer weekly SIP’s or daily SIPs, as per the convenience of the consumers. SIPs provide a better rupee cost averaging, than lump sum investments.

Globally, gold still remains a favourite asset class in the current prevailing scenario. We expect the bullish move to continue in gold, even from the current levels, especially in the backdrop of multiple key global factors, such as highly stimulative monetary policies by the world's key central banks. low global bond yields, low inflation, and dovish central bank policies, record buying in Gold ETFs, safe-haven demand due to COVID, and geopolitical tensions like trade wars and tensions related to Iran, North Korea, and Venezuela.

Impact of Tax collected at source (TCS) on physical bullion

In order to increase the tax revenues, the government of India had announced, during its annual budget of 2020-21, that sellers are required to collect Tax collected at source (TCS) from the buyers, if the sellers’ annual turnover exceeds Rs 10 crore; the tax rate is fixed at 0.1 percent on the sale consideration value exceeding Rs 0.5 crore for individual buyers. TCS will be refunded to the buyers after filing of income tax returns. This change in rule is likely to have a negative impact on physical jewellery business, although it was deferred by six months, until 1st October 2020, and has been temporarily reduced to 0.075 percent until 31 March 2021. But, after this, the rate will be restored to 0.1 percent. TCS is likely to have an impact on the working capital of the gold industry and bullion dealers' trade. It is also likely to increase the compliance burden for all. Seeing this scenario, we expect that some buyers are likely to stay away from physical buying of bullion to save on costs and avoid tax compliance. They will prefer gold ETFs for investing, which are safer, transparent, and have enough liquidity.

Impact of compulsory hallmarking

As per recent government guidelines, from June 2021, only hallmarked gold and silver jewellery will be sold in India. As per these guidelines, hallmarking will take place for jewellery in three categories: - 14 carats, 18 carats, and 22 carats. So far, it was a voluntary exercise, and if a customer wishes (which reduces the costs), they are sold as untested jewellery. Once it becomes compulsory, the cost of physical jewellery, bars, and coins is going to increase. We believe that investors will prefer digital gold in this scenario, and some percentage of that base is likely to shift towards gold ETF’s, which are relatively more convenient, compared to other modes of investments.

Source: https://www.moneycontrol.com