Inflows into gold and silver exchange traded funds climbed to an all-time high in September, as investors growing weary of the recent volatility in the stock market opt for safer assets.
Net inflows into gold ETFs increased to ₹8,363 crore in September from ₹2,189 crore in August, per data from the Association of Mutual Funds of India (Amfi) published on 10 October. Net inflows into silver ETFs rose to ₹5,341 crore from ₹1,799 crore.
Gold and silver ETFs track the price of the respective commodities and are traded on stock markets just as securities are.
Meanwhile, net inflows into equity mutual funds fell 9% from August to ₹30,421 crore in September—making for a third straight month of declining investments in equity mutual funds.
Spot gold and silver returns have far outpaced annual equity market returns. Spot gold and silver prices scaled fresh peaks this week, surging 63% and 74%, respectively, over the past year, per Bloomberg.
On the contrary, equity market returns have been weak, with benchmark indices Nifty 50 and Sensex returning 1.15% and 1.09%, respectively, over the same period.
Silver’s surge
Silver ETFs opened Thursday with a record 10-12% premium to spot prices on the back of strong demand from industries such as solar panels, EVs, and electronics.
Chirag Mehta, chief investment officer at Quantum Mutual Fund, said gold is unlikely to see the kind of premium witnessed in silver ETFs as the market is well supplied and far larger.
“The total value of all mined gold stands at about $26.5 trillion compared to silver’s $2.6 trillion, making gold a much deeper and more liquid market. Historically, gold spreads have remained thin, unlike silver’s wider fluctuations, indicating stronger liquidity and supply that prevent sharp supply-demand imbalances,” Gupta added.
The recent surge in demand for gold was due to expectation of an additional rate cut this month and mounting uncertainty surrounding the US’s policy decisions and the stability of the US dollar, added Gupta.
On 9 October, Kotak Mahindra Mutual Fund announced its decision to suspend lumpsum and switch-in transactions in Kotak Silver ETF Fund of Fund, which invests in Kotak Silver ETFs as silver trades at a premium to international prices amid a domestic supply shortage.
What should investors do?
Silver ETFs are trading at a premium to their underlying value, which indicates froth building up, said Ankur Punj, managing director and business head at Equirus Wealth.
For investors, he suggested letting the net asset values of silver ETFs cool to the underlying price of silver before investing more in it.
“While… returns of gold and silver have outpaced equity market returns, it is still important that investors maintain an asset allocation approach to their portfolio, and gold and silver should be part of overall asset allocation as a hedge to equity markets,” Punj added.
Feroze Azeez, joint chief executive officer, Anand Rathi Wealth Ltd, said the low correlation between gold and equity, similar to equity and debt, showed why it is important for investors to hold both assets for diversification.
While equity serves as a growth driver, gold provides protection during volatile periods, he said.
Historical data shows that the probability of gold outperforming debt and giving returns above 7% is just over 50%, suggesting that gold can replace the debt portion in a portfolio, but cannot replace equity, according to Azeez.
