Record Investments in Gold ETFs

According to data from the Association of Mutual Funds in India, net inflows into gold ETFs jumped to an unprecedented ₹37.5 billion (approximately $437 million) in January and ₹19.8 billion in February. This surge was driven by the metal’s rise to historic price levels.

Vishal Jain, CEO of Zerodha Asset Management, noted that many investors are shifting their focus from traditional forms of gold, such as jewellery, to gold ETFs due to their accessibility for retail traders. “Historically, Indians have had an affinity for gold. Many people are now moving towards gold ETFs for investment purposes,” he stated.

Despite India’s gold ETF holdings constituting only 2% of the global total, it ranks as the second-largest gold investor worldwide, following China, as cited by the World Gold Council (WGC).

Impact of Equity Market Performance

The appeal of gold investments is underscored by a decline in Indian equity markets, where the Nifty 50 index has decreased by 0.5% year to date. Conversely, gold has surged with a remarkable year-to-date gain of 16%. Analysts attribute this shift to a combination of ongoing economic uncertainties and the performance of the equity market.

Harshal Barot, a senior research consultant at Metals Focus, emphasized that the weakness in equities is a significant driver behind the investor shift towards gold ETFs.

Gold Prices Reach New Heights

Gold prices recently soared to over $3,000 per troy ounce, boosted by global investors seeking stability amidst fears of a potential trade war that may hinder economic growth. In India, assets under management in gold ETFs nearly doubled year-over-year, representing about 1% of total mutual fund assets by the end of February—up from 0.5% the previous year.

In urban regions like Mumbai, advertisements promoting gold ETFs have become commonplace, reflecting the growing interest among local investors.

Household Gold Holdings and Lending Trends

Indian households hold approximately 25,000 tons of gold, predominantly in the form of jewellery. Recent trends indicate an uptick in purchases of gold bars and coins, with increased investment activity driven by rising prices. Consequently, many individuals are leveraging their gold assets to secure loans from banks, enhancing liquidity in the current economic landscape.

Data from the Reserve Bank of India indicate that gold-backed loan growth surged by 74.4% from April 2024 to February this year, compared to 14% during the same period last year. Chirag Sheth, a consultant at Metals Focus, remarked on how economic distress influences this pattern of borrowing.

Shifts in Demand Dynamics

The soaring gold prices have somewhat dampened demand for physical gold, particularly in jewellery, which represents nearly 70% of consumer gold demand in India. February saw imports of gold plummet 63% year-on-year, dropping to $2.3 billion—its lowest figure since March 2024. This decline signals a broader shift in consumer behavior, despite the surge in ETF investments.

Analysts argue that while gold imports are falling, the strong performance of gold ETFs is likely a result of investors reallocating their portfolios after an underwhelming stock market performance and diminished issuance of new sovereign gold bonds by the government.

Conclusion

The current economic environment encourages a significant transition from physical gold to gold ETFs in India. The bullish sentiment surrounding gold investments continues to attract retail traders, creating a compelling narrative of resilience in the face of global uncertainty.

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