Morningstar India data shows that gold ETFs have seen high inflows when three-year or five-year returns are high, and outflows when they are not
At the end of Christopher Nolan's 2008 blockbuster movie 'The Dark Knight', super-hero Batman says something wicked,"You either die a hero, or you live long enough to see yourself become the villain." That surreal description can well, be used for gold exchange traded funds (ETFs) today. Traditionally viewed as a safe-haven, gold funds on an average have actually lost money in the last three and five years.
Just years ago, this investment product category was raking in the moolah for asset managers as investors made a mad dash to mimic gold returns. Thousands of crores worth outflows and exit of hundreds of investors later gold ETFs have been ironically set up as 'the fall guy'.
New research suggests that ETFs betting on gold, an asset which historically does well when others scamper for cover, are behaving like stocks. Morningstar India data shows that gold ETFs have seen high inflows when three-year or five-year returns are high, and outflows when they are not. This is almost mirroring how equities perform - they are darlings when the going gets good, and become villains when the going gets tough. The latter part has hit perennial gold-bugs harder, as the notion that 'nobody loses in gold' was torn apart.
Traditionally, Indians are known to buy and hold investments in physical gold for years, even generations. Gold has been seen as a store of value and inflation hedge. "But when it comes to gold ETFs or demat gold, it seems to be a different story. Over the last three years (from December 2013 to November 2016) gold ETFs have witnessed outflows in almost every month, and cumulatively an outflow of around Rs 3,000 crore," says Dhaval Kapadia, director portfolio specialist, Morningstar Investment Adviser India.
Due to the correction in gold prices globally and domestically over the last five years, the performance of gold ETFs during this period has been negative and appears to be driving the trend of outflows. Gold went up over Rs 34,000 per 10 grams in 2013, and also dropped to below Rs 25,000 by 2015-end.
On the other hand, Indian equity markets have performed well since 2014 accompanied by strong inflows from domestic investors, possibly an indication that investors have shifted assets from gold ETFs to equity.
During periods of significant distress or uncertainty in financial markets, gold attracts investors and performs well. In the Indian context, gold also acts as a currency hedge; appreciating in value when there is a fall in the rupee vis- à-vis the US dollar (the domestic price of gold is based on the international or US dollar gold price, excluding domestic taxes).
Like stocks move in tandem with positive and negative signals about actual earnings, gold increasingly dances to the tune of global interest rates, than just demand. This is why gold ETFs, even though a simple product in design, can seem complicated because of the US interest rates.
"Going forward, the focus will be on the Fed's future stance. This will determine the future trend in gold prices. If the Fed raises interest rate then the gold would see some further correction from here. However, if Fed maintains its stance of keeping interest rates low for a long time, it could put a floor to gold prices," says Sachin Jain, research analyst, ICICI Securities.
So, how should you view gold ETFs' equities-like behavior? In the short term, some experts are bullish. "There exist more uncertainties than certainties in the global macroeconomic environment of which Trump's presidency is a big unknown. We believe that barring the near term, gold prices should start moving gradually upwards in 2017," says Chirag Mehta, senior fund manager - alternative investments, Quantum AMC.
Personal finance experts think if you have taken the decision to allocate part of your investments in gold, you have to stay invested. "Nobody has a crystal ball. You invested in gold because of some reasons. If the reasons are intact, there is no need to get nervous. Gold rose 10% in 2016 even when Sensex was flat. People will still flock to gold when equities don't do well," said Manoj Sharma, a money advisor.
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