Gold ETFs lose shine amid surge in equity market

For the first time since March, gold exchange traded funds (ETFs) have witnessed outflows. The sharp rise in the equity markets in November has taken some of the sheen away from gold ETFs. The latest Amfi data showed that the gold ETF category saw an outflow of Rs 141.09 crore in the last month.

The outflow from the category comes after eight straight months of inflows. The price of the yellow metal declined 5.9% in the international markets in November whereas, according to MCX prices, gold has declined 6.6% in rupee terms. During the same period, the Sensex rose 3.5%. In December so far, gold prices (MCX) have risen 2.6% while the Sensex has risen 2.13%.

Gold ETFs saw outflows and gold prices came under pressure owing to the developments around Covid-19 vaccines with companies such as Pfizer, Moderna and institutes such as The University of Oxford announcing more than 90% efficacy of their respective vaccines in their Phase-III trials. This has led to the reduction in the economic uncertainty caused by the pandemic and investors chose to take profits from the safe haven metal, causing outflows from gold ETFs.

Chirag Mehta, senior fund manager – alternative investments, Quantum Mutual Fund, said, “The outflows from gold ETFs come after months of inflows and the extent of outflows is not alarming. There has been a knee-jerk reaction in gold prices on account of the developments surrounding the vaccine and shift in sentiment led to gold ETF outflows.”

However, market experts believe that in the longer run, gold will continue to do well. They attribute this to the abundant liquidity in the financial markets globally.

Gold ETFs, according to experts, will start receiving inflows after more fiscal stimulus measures from central banks across the world such as European Central Bank and the US Federal Reserve. Negative real rates and interests are going to keep the gold prices intact.

Additionally, supply shortages and not as much change in demand for the yellow metal would support gold prices. Anil Ghelani, senior vice-president, DSP Investment Managers, said, “Gold tends to outperform when we see high inflation and negative real interest rates. Gold prices are likely to be supported by this ultra-low interest rate environment. There is a potential for supply shortages but, on the other hand, demand has not declined too much both for industrial-end use and for investments. Hence, the long-term story of gold is likely to remain strong.”
This would make profit-taking into gold ETFs a one-off incident as opposed to a trend.

Chirag Mehta of Quantum Mutual Fund said, “The combination of lower real rates and increased stimulus from governments accompanied by expansionist policies by central banks will help gold prices appreciate in the long run. This would cause investors to buy gold ETFs once again and that’s why the outflows from gold ETFs in November can be seen as a one-off rather than as the start of an outflow trend.”