Flows into gold exchange-traded funds moderate as equities rally

The surge in the equity market has taken some sheen off gold investing. In May, inflows into gold exchange-traded funds (ETFs) offered by mutual funds (MFs) dec­li­ned to their lowest level in six months. Gold ETFs saw a net inflow of Rs 288 crore – the lo­we­st since November 2020, when the industry had repor­ted a net outflow of Rs 141 crore.
 
“The lower quantum of net inflow in May could be attributed to equity markets doing well and investors diverting a relatively large portion of their investments there,” said Himanshu Srivastava, associate director-manager research, Morningstar India.
 
In May, the benchmark Sensex posted its biggest monthly gain of 2021, surging 6.5 per cent. The broader markets outperformed with the BSE SmallCap gaining 8.9 per cent and the BSE MidCap soaring 7.1 per cent.
 
The moderation in flows was accompanied by a surge in redemptions. May saw gross redemptions of Rs 105 crore, compared to less than Rs 6 crore in the preceding month.
 
“The redemption amount also shot up signifying that a few investors chose to book profit given the recent surge in gold prices,” said Srivastava.
 
Gold prices rallied more than 4 per cent to hit a four-month high amid concerns of rising global inflation in May. A weaker dollar and easy monetary stance across developed economies are also seen as supportive of gold prices, with many experts pegging the yellow metal to extend this year’s run. Since April, gold prices have gained more than 10 per cent and currently trade above the Rs 5,000 per gram-mark.

 
"A higher inflationary environment is good for gold, which is seen as a reliable store of value, especially when rates are anchored at zero levels in much of the developed world," said Chirag Mehta, senior fund manager-alternative investments, Quantum AMC. "Gold is also expected to reflect investor concerns over record debt and deficit levels, frothy financial markets, and the emergence of inflation."
 
Market players said the second tranche of sovereign gold bonds (SGB), which was open for subscription during the last week of May, too, weighed on flows into gold ETFs. The Reserve Bank of India had a fixed issue price of Rs 4,842 per gram for the Sovereign Gold Bond Scheme 2021-22-Series II. Experts say SGBs are one of the most attractive routes for long-term investors in digital gold. Short-term investors can use the mutual fund route, they said.
 
Since November, gold ETFs have received positive flows as investors used the softness in gold prices as a buying opportunity. In the last six months, gold ETFs garnered Rs 3,177 crore. The assets under management (AUM) for the 11 gold ETFs surged to 26 per cent in the months to Rs 16,625 crore at the end of May.