In the realm of Kolkata, gold, boasting a robust Compound Annual Growth Rate (CAGR) of 13 percent over the past triennium, emerges as a compelling inclusion within one’s comprehensive asset allocation strategy, serving as a bulwark against the erosive forces of inflation and the vicissitudes of macroeconomic uncertainty through the conduit of gold exchange-traded funds (ETFs) and sovereign gold bonds (SGBs), as espoused by industry cognoscenti and market analysts. Whilst the populace of India has historically harbored an ardent affection for the auriferous metal manifested in the form of ornate gold jewelry, the advent of ETFs and SGBs proffers the felicity of gold ownership sans the encumbrance of procuring and safeguarding physical bullion at the expense of a safety deposit box.
Chintan Haria, Principal–Investment Strategy at ICICI Prudential AMC, opines, “The ritualistic acquisition of gold during the propitious occasion of Akshaya Tritiya stands as an entrenched tradition in the Indian ethos. Notably, the aureate commodity has yielded a commendable CAGR of 13 percent over recent annals, with the vista ahead imbued with optimism. The prospective deferral in the Federal Reserve’s deliberations regarding interest rate adjustments, burgeoning geopolitical frictions, the lofty valuations characterizing the domestic equity market, and the electoral outcomes all conspire to maintain gold in the limelight.”
“Given this landscape, it behooves one to contemplate the inclusion of gold within their overarching asset allocation strategy and as a hedge against the vagaries of inflation and macroeconomic vicissitudes. Presently, avenues for gold exposure abound, with the most facile among them being investment in a Gold ETF. Facilitating a seamless and cost-effective means of acquiring exposure sans the encumbrance of physical custody or storage concerns, the Gold ETF warrants consideration. Liquidity concerns are likewise assuaged, as units thereof can be transacted on the exchanges during customary trading hours,” Haria adds.
What Constitutes a Gold ETF?
Gold Exchange Traded Funds (ETFs) epitomize uncomplicated investment instruments amalgamating the malleability of stock market participation with the straightforwardness inherent in gold investments. These ETFs are actively traded on the cash market segments of the National Stock Exchange and the Bombay Stock Exchange, akin to equities, thereby affording investors the latitude to engage in seamless buying and selling at prevailing market prices. Functioning as passive investment vehicles tethered to gold prices, Gold ETFs pivot upon investments in gold bullion, thereby affording complete transparency regarding asset holdings. Moreover, owing to their distinctive structure and creation mechanism, ETFs entail markedly lower expenses vis-à-vis physical gold investments. The Assets Under Management (AUM) of Gold ETFs have burgeoned twofold over the span of three years, surging from Rs 16,508.8 crore in June 2021 to Rs 33,000 crore in April.
What Delineates a Sovereign Gold Bond?
Sovereign Gold Bonds emerge as a sui generis investment conduit amalgamating the allure of gold with the convenience intrinsic to bond investments. Issued by the Reserve Bank of India, these bonds are crafted to afford individuals the opportunity to partake in gold-centric investments sans physical possession thereof. Bestowing a fixed interest rate of 2.5 percent, disbursed semi-annually based on the issue price, Sovereign Gold Bonds obviate the imposition of fabrication charges or Goods and Services Tax (GST). Save for nominal annual maintenance charges in the event of dematerialized holding, storage expenses are non-existent, with the outlay reduced to zero in the case of physical certificates.
In the realm of physical gold acquisition, the specter of adulteration perennially looms large. Conversely, Sovereign Gold Bonds obviate direct gold involvement, vesting confidence in the imprimatur of the Reserve Bank of India and the Government of India to honor the stipulated gold price upon redemption.
Gold ETFs and Gold Funds endeavor to mirror the returns engendered by physical gold; however, owing to expense ratios and the ebb and flow of fund inflows and outflows, marginally diminished returns often ensue. Such conundrums find no resonance within the domain of Sovereign Gold Bonds.
Punditry Perspectives
Tapan Patel, Commodities Fund Manager at Tata Asset Management, contends, “Gold prices bore witness to an emphatic surge in March 2024, scaling unprecedented zeniths in both domestic and international precincts. Domestic gold prices breached the Rs 73,000 per 10 grams threshold, while COMEX prices eclipsed the $2400 per ounce milestone. Notably, investors have been divesting their gold holdings via redemption in instruments such as Sovereign Gold Bonds and Gold ETFs. However, the upward trajectory of gold prices is likely to be buttressed by global macroeconomic headwinds, Central Bank acquisitions, and geopolitical exigencies. The Federal Reserve’s pivot vis-à-vis interest rate dynamics may furnish an abrupt fillip to prices, with markets still acclimating to the prospect of a protracted spell of elevated rates.”
“We opine that gold prices are poised for a marginal correction from prevailing levels, even as we remain sanguine regarding the medium-term outlook predicated upon supportive fundamentals, advocating a phased approach to acquisition. Investors may contemplate dynamic asset allocation across the gamut of gold-centric instruments available in the market, alongside judicious forays into physical gold ownership. Long-term investors, in particular, may find succor in Sovereign Gold Bonds, enabling them to derive ancillary benefits in the form of fixed interest returns. Conversely, investors with a penchant for medium to short-term horizons, whether adopting a staggered or lump-sum approach, may gravitate towards gold ETF schemes,” Patel expounds.