IAS Gyan

Daily News Analysis


20th September, 2023 Economy

Copyright infringement not intended

Picture Courtesy: zfunds.in

Context: Gold exchange-traded funds (ETFs) in India attracted an inflow of Rs 1,028 crore in August, which was the highest monthly inflow in 16 months. This indicates a significant increase in investor interest and investment in Gold ETFs during that particular month.

Key Factor responsible for this Increase

  • US Interest Rates: The continued hikes in interest rates in the US have had an impact on the global financial markets. Higher interest rates tend to increase the opportunity cost of holding non-interest-bearing assets like gold. As a result, some investors may have shifted their funds from traditional investments to Gold ETFs, which are seen as a haven during times of economic uncertainty.
  • US Economic Growth: The slowing growth rate in the US, likely influenced by the interest rate hikes, could have made investors more cautious about the stock market and other riskier assets. Gold is often considered a hedge against economic uncertainty, so investors may have turned to Gold ETFs to protect their portfolios.
  • Global Geopolitical Tensions: Geopolitical events often create uncertainty in financial markets, leading investors to seek safe-haven assets like gold.
  • Inflation Hedge: Gold is often used as a hedge against inflation. With inflation rates higher than expected, investors may have turned to Gold ETFs as a way to preserve their purchasing power.
  • Fundamentals of Gold: Gold prices had come off their all-time highs, providing a buying opportunity for investors. After a sharp rally earlier in the year, gold may have seemed more attractive at lower price levels.
  • Market Sentiment: Investor sentiment and perceptions of the economic environment can play a significant role in the demand for gold. Positive sentiment towards gold and its prospects can drive inflows into Gold ETFs.
  • Gold's Track Record: Gold's strong performance in recent years may have attracted investor interest and confidence in the asset class, leading to higher inflows.

Gold Exchange Traded Funds (Gold ETFs)

  • Gold Exchange Traded Funds (Gold ETFs) are a popular investment option that provides exposure to the price of gold without the need to physically own and store the precious metal.
  • Commodity-Based ETF: Gold ETFs are a type of commodity-based exchange-traded fund, with their primary underlying asset being gold. This means that the value of the ETF is directly linked to the price of gold.
  • Passive Investment: Gold ETFs are passive investment instruments. They do not actively manage a portfolio of assets but instead aim to replicate the performance of gold prices. This passive approach helps keep management fees relatively low.
  • Ownership of Physical Gold: Gold ETFs hold physical gold bullion as their underlying asset. Each unit of a Gold ETF represents a specific quantity of physical gold, typically equivalent to 1 gram of gold. This gold can be held in either paper or dematerialized (electronic) form.
  • Liquidity and Flexibility: Gold ETF units are listed and traded on stock exchanges, just like individual stocks. Investors can buy and sell Gold ETF units throughout the trading day at prevailing market prices, providing liquidity and ease of access.
  • Transparency: Gold ETFs offer complete transparency regarding their holdings. Since their value is directly tied to the current price of physical gold, investors can easily verify the ETF's asset backing.
  • Cost-Effective: Investing in Gold ETFs is often more cost-effective compared to buying physical gold. Investors are not responsible for expenses related to storing, insuring, and transporting physical gold. Additionally, the management fees for Gold ETFs are usually relatively low.
  • Diversification: Gold ETFs allow investors to diversify their portfolios by adding exposure to gold, which can act as a hedge against economic uncertainties and inflation.
  • Tax Efficiency: Depending on the jurisdiction and tax laws, Gold ETFs may offer tax advantages compared to owning physical gold.
  • Accessibility: Gold ETFs provide an accessible way for a wide range of investors, including retail investors, to invest in gold without the barriers associated with purchasing and storing physical gold.
  • Risk Factors: While Gold ETFs offer several advantages, they are not entirely risk-free. The value of the ETF can still be influenced by factors like changes in the gold market, currency fluctuations, and management expenses. Additionally, like all investments, they are subject to market risk.

Must Read Articles:

Gold Exchange Traded Funds (ETFs): https://www.iasgyan.in/daily-current-affairs/gold-exchange-traded-funds-etfs


Q. Consider the following statements:

Statement 1: Exchange-traded funds (ETFs) are a type of investment fund and can include assets like stocks, bonds, or commodities.

Statement 2: ETFs are actively managed investment vehicles that aim to outperform the market.

Which one of the following is correct in respect of the above statements?

A) Both Statement-1 and Statement-2 are correct, and Statement-2 is the correct explanation for Statement-1.

B) Both Statement-1 and Statement-2 are correct, and Statement-2 is not the correct explanation for Statement-1.

C) Statement 1 is correct, but Statement 2 is incorrect.

D) Statement 1 is incorrect, but Statement 2 is correct.

Answer: C


Statement 1 is correct: ETFs are a type of investment fund, and they can include a variety of assets, including stocks, bonds, and commodities.

Statement 2 is incorrect: ETFs are typically passive investment vehicles that aim to replicate the performance of a specific index or asset class, rather than actively managed funds that seek to outperform the market. Therefore, Statement 2 does not provide a correct explanation for Statement 1.

So, the correct answer is C) Statement-1 is correct, but Statement-2 is incorrect.