Gold ETF Boom: Why Indian Investors Are Rushing to Buy Amid Soaring Demand!

03 October 20244 mins read by Angel One

Indian investors hold a very invaluable and unique position as they ride the current bull market cycle for gold as an asset. The key financial instrument that investors are preferring is the Gold ETF. With Sovereign Gold Bonds somewhat out of the market, Gold ETFs are what investors are focusing on for their gold investments.

The main reason for the preference for Gold ETFs across the world, including by central banks, is their liquidity, i.e., investors can buy and sell Gold ETF units with ease, just like stocks on any of the stock exchanges.

Sovereign Gold Bonds have a liquidity issue compared to ETFs. Also, investing in SGBs was primarily driven by the expectation of tax benefits and the interest earned on them. Inflows into Gold and Silver ETFs have been very decent this year across the industry, and they are still picking up globally. Inflows into Gold ETFs in India are almost 3x to 4x those of last year. This growth has primarily come due to two reasons:

Product Awareness
Portfolio Diversification

The preference for multi-asset strategies is picking up in India among retail investors. With an increase in the size of their portfolios, retail investors are looking for asset diversification, and gold is an ideal asset for hedging portfolios.

Turning to silver as a precious metal, this is also gaining interest, with Indian investors now having the option to invest in it through the ETF route. Silver is much bulkier than gold. The traditional physical buyers or investors of silver are shifting into ETFs. Around 15% of silver consumed in India is for investment purposes. The rate of increase in the AUM of Silver ETFs has been faster than that of Gold ETFs.

The growth story for both gold and silver has been robust in the past, and the trend remains strong. Central banks have been buying large quantities of gold since 2022. They have been purchasing roughly 2x to 2.5x the quantities they typically bought earlier. This trend is expected to continue this year as well. For silver, the demand-supply gap is fairly tight, and there has been a deficit for the past 3–4 years.

Central bank holdings of U.S. Treasuries 25 years ago made up about 75 to 80% of their total portfolio. This has now decreased to below 60%. If this trend continues for another 10–12 years, we may see U.S. dollar holdings become a minority portion of most central banks’ portfolios.

Given the geopolitical developments and uncertain times, gold is one of the must-have assets in any portfolio. Even if there is volatility in the short term, the long-term outlook for gold and silver as attractive asset classes remains intact. This trend holds true not only for India but for other global markets as well. Perhaps this is why there has been no major correction in gold prices.

So, is every dip in gold prices a buying opportunity? Investors should make informed investment decisions after considering all important aspects that may impact gold prices in the short and long term.