Gold ETFs Inflow Hit A 16-Month High In August: Should You Invest In The Yellow Metal?

Gold Exchange Traded Funds (ETFs) have seen an enormous spike in inflows, reaching a 16-month high in August. These ETFs received net inflows of Rs 1,028 crore, according to statistics from the Association of Mutual Funds in India (AMFI). According to AMFI data, this brings the category's total year-to-date inflow to almost Rs 1,400 crore. Investor accounts in Gold ETFs jumped by 20,500 folios in August compared to July, reaching 47.95 lakh. Additionally, from Rs 23,330 crore in July to Rs 24,318 crore in August, the AUM of Gold ETFs jumped by more than 4%. Should investors buy gold exchange-traded funds (ETFs) considering the ongoing volatility in gold prices brought on by the rising dollar index and fluctuations in the bond market? Let's know the Gold ETF story outlook from Jateen Trivedi, VP Research Analyst at LKP Securities.

How much of one's portfolio should comprise Gold ETF?

Gold ETFs have emerged as a modern alternative to traditional gold purchases from jewellers. In today's digital age, buying gold has become more convenient, literally at one's fingertips. When it comes to portfolio allocation, Gold ETFs should typically represent at least 15% of the portfolio, especially if it consists primarily of large-cap or index funds. However, in portfolios that include mid-cap and small-cap investments, it's advisable to allocate a minimum of 20% to gold. This allocation helps mitigate volatility and enhances stability, particularly during uncertain global economic conditions, said Jateen Trivedi.

Should one only invest in gold ETF and not in physical gold?

No, it's not recommended to rely solely on Gold ETFs and neglect physical gold. Physical gold holds a unique sentimental and cultural value for many, and it is considered auspicious in Indian traditions. Therefore, it's prudent to strike a balance. While a significant portion of your gold investments can be in the form of Gold ETFs to combat inflation (as cash tends to depreciate over time), maintaining physical gold is important for both emotional and financial reasons, Jateen Trivedi answered.

What advice should you give to the millennials on gold? What portion of their portfolio should be assigned for gold and why?

For young individuals with disposable income, allocating 15-20% of their savings to gold is advisable, alongside long-term market-linked investments. This allocation should consist of a mix of Gold ETFs, sovereign gold bonds, and physical gold. Sovereign gold bonds are particularly attractive due to the fixed income (currently 2.5%) offered by the government.

Physical gold, in the form of jewellery primarily used during festivals and weddings, should form a smaller part of the allocation. This strategy combines the benefits of steady returns from bonds, the flexibility of ETFs, and the cultural significance of physical gold. In the long term, a diversified portfolio offers better returns, especially during goal-based redemptions when market conditions might be unfavourable, commented Jateen Trivedi.

Gold prices are currently hovering around Rs 58,000 per 10 gm level. Do you think that prices of gold will rise over the next three months of 2023? What will drive the gold prices given that the FED has put a pause on rate hikes?

Gold prices are currently experiencing some volatility due to a rising dollar index and fluctuations in the bond market. The high interest rates have prompted significant investments in the dollar to counter interest rate effects. The Federal Reserve's indication of a prolonged period of elevated interest rates has led to increased dollar buying and short-term profit-taking in gold.

However, such scenarios often present opportunities when viewed in the context of gold's longer-term bullish trend, which has been ongoing since 2019. Investors can consider gradually allocating investments to gold via ETFs or Sovereign Gold Bonds (SGBs) because gold prices are likely to gain momentum once the Federal Reserve believes that inflation has reached manageable levels.

As the dollar weakens, potentially returning to levels around $100, gold prices could easily climb back above Rs 60,000 within the next 3-6 months. This anticipated rise is contingent on a shift in the Federal Reserve's stance and its prediction of inflation returning to comfort levels. Gold's historical performance suggests it could be a valuable asset in times of market uncertainty and currency fluctuations.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.