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Concern over global uncertainties prompt exchange traded funds to go for gold

Mon Dec 02 2019



The last few months saw a structural change in the gold market with investors taking refuge in time-tested havens such as the gold-backed exchange traded funds (ETFs) amid concerns over slowing global economy and as uncertainties on account of US-China trade war loom.


Reeling under high prices, demand for the yellow metal in the July-September quarter dipped sharply by 32 per cent to 123 tonnes (183 tonnes), the lowest third quarter demand since 2005, while investments in physical gold in the form of gold bars and coins plunged 35 per cent to 22 tonnes (34 tonnes).


Prices apart, an increase in import duty from 10 per cent to 12.5 per cent has also been been blamed for the lower demand. Even worse is demand failed to pick up in the festive month of October with India importing 38 tonnes of gold, down 33 per cent from 57 tonnes a year ago.


Somasundaram PR, managing director, World Gold Council said it is really intriguing that the gold demand has fallen so sharply even while sales of premium cars and smartphones have gone up substantially in the slowing economy.


Calling it as a crunch on middle-class, he said that the low general consumer confidence and sharp spike in gold prices had taken a heavy toll on gold demand. The council also warned that gold demand is expected to drop to a mere eight per cent from a year ago to close to 700 tonnes in the year 2019, the lowest since 2016.


High prices have also resulted in more people selling their gold in the market. Total recycled gold in the third quarter  stood at 36.5 tonnes, up 59 per cent from a year ago. Overall gold recycling is set to touch a new high this year as in the last three quarters, the country had recycled 90.5 tonnes of gold, crossing the entire last year’s recycling level of 87 tonnes.


So who is buying gold and keeping prices higher?


Gold prices failed to lose momentum during the quarter breaching the Rs 35,000 per 10 gram logged mid-July to Rs 38,795 by the end of September quarter. On December 1, the price of gold stood at Rs 39,300 per 10 gram. Interestingly, holdings in gold-backed ETF hit an all-time high of 2,855 tonnes with an inflow of 258 tonnes, highest quarterly inflow since the first quarter of 2016.


To this, Somasundaram said the inflow will remain high as there is a strong fear of the US economy slipping into a recession ahead of the US presidential election slated in second half of next year. It was only because of the sharp surge in demand from ETFs that global gold demand has risen by three per cent in the third quarter of 2019.


Should investors continue to purchase Gold ETF?


Yes, say financial advisors. In the midst of heightened global uncertainty and headwinds in play, where the mood of equity market is hard to predict, it makes good sense to go for gold-backed ETFs. Benefits such as — low cost, better resale value as its sold at prevailing market price and its quality make ETFs a good choice.


Furthermore, investors also do not have to dole out premium unlike physical gold, where an investor would pay for making charges additionally. However, one may allocate only 10-15 per cent of their entire portfolio to gold through a gold ETF with a long-term investment horizon.