Over thousands of years, gold has maintained its allure as a commodity or as a currency and it is no surprise that it still retains its appeal as an investment asset. Gold has been used as a portfolio diversifier in modern times to hedge against inflation, geo-political and economic risks. In that context, it is crucial for retail investors to understand the ways in which they can invest or have exposure to gold. While holding physical gold has traditionally been preferred in India, it may not be prudent from an investment perspective. The other medium of taking exposure to gold is through derivatives like futures which are traded on commodity exchanges. While trading in futures is lucrative owing to requirement of a small margin, small investors could get caught by big mark-to-market losses. This brings us to the next best option which is Gold ETF’s.
What is a Gold ETF?
Gold Exchange Traded Fund (ETF) is a kind of investment fund that is traded on exchanges and money collected from all investors is invested in gold. These funds are passively managed and they ensure good returns quite close to the returns from physical gold. ETFs offer the option of investing in gold without holding physical bullion. It is like an open-ended mutual fund whose units represent physical gold that is 99.5% pure, with each unit representing 1 gram of gold
Advantages of investing in gold ETFs :
They are backed by physical gold
Since the gold is held in the electronic form, questions on the purity of the metal do not crop up
There is no risk of theft and no worry about the storage cost
Gold can be purchased in small quantities which provides an opportunity to investors to accumulate gold over a longer period as per their financial goals
They are traded on exchanges and hence gold ETFs can be bought/sold at transparent prices across India
In comparison to physical gold, gold ETFs are more tax efficient because Wealth tax comes into play when you hold more than a certain amount of physical gold.
No sales tax, VAT or securities transaction tax is applicable on gold ETFs.
Asset management fees are applicable as per the fund house you invest with, so the return is slightly less than the actual increase in the gold price. Other charges at time of buying and selling include brokerage/commissions
Some Gold ETF’s can be illiquid and hence could impact flexibility of buying and selling
You can redeem most ETF’s only in terms of cash and not gold
While ETF’s are not subject to wealth tax, they are treated as non-equity investments and taxed accordingly.
Short-term capital gains on units held for less than 36 months will be added to investor's income and taxed as per the applicable slab rate.
Long term capital gains on units held for more than 36 months will be taxed at 20% after providing for indexation
We continue to believe that the trend in investment demand going forward will be the prime driver of prices given that physical demand impacts price only at the margins. From an investment perspective, a big factor to watch this year will be the imminent rise in inflation. In our view, reflation across the world will boost the appeal for gold as an inflation hedge.
The other big focus of global markets and gold investors will be on how fiscal policies change, especially in the US, where the election of Donald Trump as President has brought in a whole lot of uncertainties. While Trump is widely expected to introduce expansionary fiscal policies, his views on other economic policies and the US monetary policy are less clear which muddles the outlook for gold in the short term. The big fallout of his tenure will be elevated geo-political uncertainty given his protectionist tendencies. This in our view could be the biggest upside catalyst for gold as safe haven demand could re-emerge if we see signs of a trade war. Additionally, political uncertainties from Europe, especially France will provide another potential trigger to safe haven demand.
As far as downside risks go, the Fed is on course for three rate hikes this year which will be major headwind to prices. The scope for further accommodation from ECB and the BOJ also looks limited which will slow down rise in global liquidity and take away a key support for gold. However, incremental downward pressure from Fed hikes will be limited given that markets have largely factored in the rate hikes. In fact, if Fed wavers from its path like it did in 2016, we could see a bigger positive surprise for gold.
In terms of price, we believe that $1180-1150 on the Comex will provide strong floor to prices even if we see a correction in the short term and the upside could extend towards $1320-1350 in H1 if the positive triggers play out.
In domestic context, we expect ₹ 28000-28250 to hold and thereby provide better levels for long term investors to take entry. On the upside, ₹ 30,000 is a key psychological barrier but we expect 30800-31200 in line with Comex targets.