Gold ETFs and Sovereign Gold Bonds: Transparent Instruments to Hedge against Inflation

Gold price has appreciated by 20 per cent this Akshaya Tritiya as compared to last year's Akshaya Tritiya. With prices moving northwards, people can buy paper gold, which will help them not to carry the burden of maintaining a locker for physical gold in the form of jewellery.

Kolkata:Gold, which has given a healthy CAGR of 13 per cent in the last three years, is worth considering as part of one's overall asset allocation and as a hedge against inflation and macroeconomic uncertainties in the form of gold exchange-traded funds (ETFs) and sovereign gold bond (SGB), feels industry experts and analysts. While Indians historically have a love for the yellow metal in the form of gold jewellery, having ETFs and SGBs can help one to hold gold without any additional burden of maintaining a locker at an additional cost and being tensed about the security of the gold jewellery.

Chintan Haria, Principal–Investment Strategy, ICICI Prudential AMC, said, “Buying gold on the auspicious occasion of Akshaya Tritiya is one of the long-held traditions in India. Since the past three years, the yellow metal has delivered a healthy CAGR of 13%. In the future, too, the outlook remains positive. Potential delay in the US Federal Reserve’s interest rate reduction decision, rising geopolitical tensions, expensive domestic equity market valuation and parliamentary election outcomes are all factors due to which gold is likely to remain in the spotlight.”

“Given this scenario, it may be worth considering gold as a part of one's overall asset allocation and as a hedge against inflation and macroeconomic uncertainties. Today, an individual has multiple ways to gain exposure to gold, and the easiest among them is to invest in a Gold ETF. Gold ETF is a convenient and cost-effective way to gain exposure without having to worry about physical ownership or storage. Liquidity, too, is not a matter of concern as units of gold ETF can be bought and sold on the exchanges during trading hours,” Haria added.

What is gold ETF?

Gold Exchange Traded Funds (ETFs) are simple investment products that combine the flexibility of stock investment and the simplicity of gold investments. ETFs trade on the cash market of the National Stock Exchange and Bombay Stock Exchange, like any other company stock and can be bought and sold continuously at market prices. Gold ETFs are passive investment instruments that are based on gold prices and invest in gold bullion. Because of its direct gold pricing, there is complete transparency on the holdings of an ETF. Furthermore, due to its unique structure and creation mechanism, ETFs have much lower expenses as compared to physical gold investments. The Asset Under Management (AUM) of gold ETF has doubled in three years to Rs 33,000 crore in April from Rs 16,508.8 crore in June 2021.

What is a Sovereign Gold Bond?

Sovereign Gold Bonds are a unique investment avenue that combines the attributes of gold with the convenience of bonds. These bonds are issued by the Reserve Bank of India aiming to provide individuals with an opportunity to invest in gold without physically owning it. Sovereign Gold Bond will yield 2.5% interest, paid semi-annually, on the issue price. There is no making charges or GST. Except for the annual maintenance charges in case it is held in demat mode, there are no storage costs involved. It’s zero for physical certificates.

In buying physical gold, there is always the probability of impurities. In Sovereign Gold Bond, there is no physical gold involved, only the guarantee of the Reserve Bank of India and the Government of India to honour the gold price on redemption.

Gold ETFs and Gold Funds try to replicate the returns of physical gold, but due to expense ratio and inflow and outflow of funds, they end up making slightly less return. No such issues are there with SGBs.

Experts speak

Tapan Patel, Fund Manager-commodities, Tata Asset Management, said, “Gold prices have witnessed a sharp rally in March 2024 with prices hitting all-time highs in domestic and international markets. Gold prices in India have crossed Rs 73,000 per 10 grams while at COMEX prices have crossed the $2400 per ounce mark. We have seen investors cashing out their investment in gold with redemption in instruments like SGB and gold ETFs. However, gold prices may continue to get support from global macro headwinds, Central Bank buying and geopolitical factors. The US Fed pivot of interest rate cycle may provide a sudden boost to the prices where the market is still bracing for ‘higher for longer’ rate scenario.”

“We believe gold prices are poised for minor correction from current levels while we remain bullish over the medium term on supportive fundamentals with a staggered buying approach. Investors may choose dynamic asset allocation to the gold-related instrument available in the market apart from physical ownership of gold. Long-term investors may look for Sovereign Gold Bonds to take additional advantage of fixed interest on the investment. Investors looking for a medium to short-term investment through staggered or lump sum buying may opt for gold ETFs schemes,” Patel said.