Gold ETFs: 25 months of continuous outflow

Fresh sales of gold ETFs remain muted, thanks to continuous weakness in gold prices for over two years, coupled with a negative outlook amid a strong stock market

Indian retail investors continue to sell their gold exchange-traded funds.

Although gold ETFs used to be one of the fast-growing asset classes, attracting a rising number of investors, they are now falling out of favour.

Fresh sales of gold ETFs remain muted, thanks to continuous weakness in gold prices for over two years, coupled with a negative outlook amid a strong stock market.

In the first quarter of the current financial year, gold ETFs’ gross sales reduced to a mere Rs 23 crore (Rs 230 million); in the first six months of 2015, it stood at just Rs 26 crore (Rs 260 million).

Investors continue to redeem gold ETFs units bringing the net inflows during the period in the negative territory of Rs 231 crore or Rs 2.31 billion (Rs 547 crore or Rs 5.47 billion in the first half of CY2015).

Interestingly, there were no sale of gold ETFs in May, while net outflow stood at Rs 86 crore (Rs 860 million), according to the Association of Mutual Funds in India.

Zero sales have happened for the second time so far this calendar year.

The earlier month with no sales was February.

Such an approach is taking a toll on gold ETFs' asset under management as well.

For instance, since 2012-13, AUM of gold ETFs have nearly halved to Rs 6,650 crore (Rs 66.5 billion).

Moreover, June was the 25th month in a row when the asset category saw net outflow, as investors kept redeeming units.

Milind Barve, managing director of HDFC Mutual Fund, said, “The good part is that those who had been buying into gold and other physical assets for many years are now interested in buying financial assets such as equities.”

India Ratings & Research, part of the Fitch Group, in its report, maintains a negative outlook on domestic gold prices for this financial year.

“In the event of a US (interest) rate hike, global gold prices could drop and range between $900 and $1,050 per ounce. Domestic prices might decline and range between Rs 20,500 and Rs 24,000 per 10g from the current Rs 25,000,” the report said.

Gold ETFs were launched by India’s mutual funds in 2006-07.

In March 2007, the asset class had an AUM of Rs 96 crore, rising to Rs 11,648 crore (Rs 116.48 billion) in March 2013 and since then it has been declining on an annual basis.

Since then, against drying of fresh sales, overall net outflow has been about Rs 4,000 crore (Rs 40 billion).

During this time, the number of investors in gold ETFs declined from a little over 600,000 to 466,000.