Expectations of gold prices surpassing $2,400 per ounce initially contributed to substantial inflows into gold exchange-traded funds (ETFs). However, these inflows saw a decline in June due to a reduction in return on investment, as per analysts.
The Association of Mutual Funds in India (AMFI) released data on Tuesday indicating a notable shift in the investment landscape for precious metals.
Gold ETF inflows drop amid price corrections
Gold ETFs experienced net inflows of 7.26 billion rupees in June, marking a 12% decrease from the 8.27 billion rupees recorded in May.
Despite the dip in inflows, the value of assets under management (AUM) for 17 ETFs rose to 343.55 billion rupees in June, up from 316.89 billion rupees in May.
The number of folios increased slightly from 5.3 million in May to 5.4 million by the end of June, as per AMFI data.
Ajay Kedia, director at Kedia Advisory, attributed the reduced inflows to a correction in gold prices. On May 20, gold prices peaked at an all-time high of $2,454.2 per ounce on COMEX and 74,442 rupees per 10 grams on the Multi Commodity Exchange of India (MCX).
Since then, prices have declined nearly 4%, closing at 71,582 rupees on June 28.
“Typically, when gold is trading at almost all-time high levels, traders tend to book profits,” said Abhishek Bisen, head of fixed income at Kotak Mutual Fund.
However, the overall bullish momentum in precious metals and a generally optimistic market outlook have balanced the scenario, leading to consistent, albeit lower, inflows.
Geopolitical tensions and economic slowdown favour gold investment
Gold’s high liquidity has continued to attract investors to ETFs, noted Mahendra Luniya, digital gold expert and chairman of Vighnaharta Gold Ltd. Looking ahead, Kedia expects that ongoing geopolitical tensions, an economic slowdown, and volatility in equity markets will make gold a preferred investment option. These factors are anticipated to drive increased inflows into gold ETFs.
At 1210 IST on a recent trading day, the most-active August gold contract on the MCX was down 0.2% at 73,167 rupees per 10 grams. The corresponding contract on COMEX was down 0.5% at $2,409.5 per ounce.
Silver ETFs experience a surge in inflows
Contrasting with the trend in gold ETFs, silver ETFs saw a significant increase in inflows, amounting to 8.1 billion rupees in June. This represents a rise of over 73% compared to the 4.7 billion rupees recorded in May.
The mutual fund industry now hosts 12 silver ETFs and nine silver fund-of-funds, as per Value Research data. The number of folios for silver ETFs grew from 248,738 in May to 323,321 by the end of June.
Abhishek Bisen highlighted that silver’s industrial demand, particularly from the electric vehicle sector, has bolstered its appeal as an investment.
“Geopolitical tensions and the increasing use of silver in electronics and solar panels are supporting silver prices,” he said.
Kedia added that industrial demand for silver is projected to reach a record high of 510 million ounces, driven by its applications in various sectors.
Silver prices, which peaked at a lifetime high of 96,493 rupees per kilogram on the MCX on May 29, have since declined nearly 10%, closing at 87,167 rupees per kilogram on June 28. At 1212 IST, the most active September silver contract on the MCX was down 1.3% at 92,944 rupees per kilogram, while the same-month contract on COMEX fell 1.8% to $31.1 per ounce.
Growing investor interest in silver as an industrial metal
Analysts and fund managers predict continued inflows into silver ETFs. According to the World Gold Council’s survey cited by Kedia, 35% of investors are diversifying into silver as part of their precious metals portfolio strategy.
Economic uncertainties, such as high inflation rates in major economies, and geopolitical tensions have increased market volatility, prompting investors to seek safe-haven assets like silver.
Bisen pointed out that while gold remains relatively expensive, silver appears more affordable, making it an attractive option for long-term investors due to its industrial use.
Experts foresee silver prices reaching 150,000-175,000 rupees per kilogram on the MCX in the long term, with expectations of prices hitting 125,000 rupees per kilogram by the end of 2024.
Industrial demand for silver is forecast to rise by 9% this year to a new record high, even as global silver supply is projected to fall by 0.7% to 1 billion ounces due to a decline in mine output, according to the World Silver Survey 2024.
The contrasting trends in gold and silver ETF inflows reflect the broader market dynamics and investor sentiment towards precious metals. While gold remains a reliable investment amidst economic and geopolitical uncertainties, silver’s industrial demand and affordability are driving its popularity.
As the global economic landscape continues to evolve, the performance and attractiveness of these precious metals will likely remain a focal point for investors seeking stability and growth in their portfolios.
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