Gold Exchange Traded Funds (ETFs) see the highest outflows (UPSC Current Affairs)

Relevance: GS3 - Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.

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Why in the news?

According to the recently released World Gold Council report, Global gold exchange-traded funds (ETFs) registered the highest net outflows of $4.5 billion in July 2022. This was the third consecutive month of outflows and the worst since March 2021. From India, Gold ETFs witnessed a net outflow of Rs 457 crore.

What is a Gold ETF?

• Gold ETF is a passive investment instrument based on gold prices.
• It offers investment in gold bullion by tracking the domestic physical gold price.
• Its unit represents physical gold which may be in paper or dematerialized form (in an electronic form). Hence, while selling a gold ETF unit, an investor will not get physical gold but the cash equivalent.
• One gold ETF unit is equal to 1 gram of gold of very high purity.
• Gold ETFs are listed and traded like a stock of any company on the Bombay Stock Exchange(BSE) and the National Stock Exchange of India (NSE).

What are the benefits of Gold ETF?

• It offers the flexibility of stock investment and the simplicity of gold investments.
• It has much lower expenses as compared to physical gold investments.
• It is also accepted as collateral by banks for loans.
• No fear of theft: it is safe and secure as it is held in the Demat Account of the holder.
• It also offers complete transparency on the holdings of an ETF.
• It is a tax-efficient way to hold gold as the income earned from it is treated as long term capital gain.
• Guarantees purity of the gold as its every unit is backed by physical gold of high purity.

What are the risks associated with Gold ETF?

• It is subject to market risks impacting the price of gold.
• It is also subject to SEBI Mutual Funds Regulations.
• Mandatory regular audit of the physical gold bought by fund houses by a statutory auditor.

What are possible reasons for the outflow?

• Fall in Gold prices due to an increase in investors’ expectations from other assets due to rising interest rate cycle. This has impacted the net flows into the gold ETFs.
• In India, falling rupee is another factor that has likely impacted the demand and supply dynamics of gold.
• This trend also is being witnessed globally too, with gold ETF's posting significant outflows due to lower gold prices
• This outflow could also be due to the diversion of money from gold to other asset classes as a part of a portfolio rebalancing strategy.

Some important FAQs

MCQs

Question: With reference to Gold Exchange Traded Funds (ETFs), consider the following statements:

1. Gold ETF is a passive investment fund that aims to track the price of physical gold.
2. One Gold ETF unit is equal to 1 gram of gold of very high purity.
3. Investors get the gold in dematerialized form (electronic form).
4. Investors cannot buy and sell ETF units in the stock market.

Which of the following statements is/are correct?

(a) 1, 2 and 3 only.

(b) 1, 2 and 4 only.

(c) 1, 3 and 4 only.

(d)  All of the above.