Indians Turning to Gold as Stocks Sag

Indian investors are turning to gold as the domestic stock market tanks.

This isn't a surprise, but there is a twist. Indians are increasingly turning to ETFs to gain exposure to the yellow metal.

Indians have a long love affair with gold. The country ranks as the second-largest gold market. The yellow metal is highly valued as a store of wealth, especially in poorer rural regions. Around two-thirds of India’s gold demand comes from beyond the urban centers, where large numbers of people operate outside the tax system. Many Indians use gold jewelry not only as adornment but as their savings.

According to the Financial Times, "Indians now own about 25,000 tonnes of gold and have been cashing in on the rally by taking out loans from banks, using their holdings as collateral while prices remain elevated."

Given the cultural context, the quick pivot to gold during a bear stock market is not surprising. 

The Indian Nifty 50 index is down 0.5 percent year to date, with the broader Indian stock market down over 5 percent. Meanwhile, gold has ranked as the best-performing asset class, with year-to-date returns well over 10 percent. 

The Rise of the Indian Gold ETF

Interestingly, Indian investors are turning to ETFs to gain exposure to gold. 

A gold ETF is backed by a trust company that holds metal owned and stored by the trust. In most cases, investing in an ETF does not entitle you to any amount of physical gold. You own a share of the ETF, not gold itself. ETFs are a convenient way for investors to play the gold market, but owning ETF shares is not the same as holding physical gold.

About 2.2 tonnes of gold flowed into India-based ETFs last month, pushing collective holdings to 64.6 tonnes. Cumulative Indian ETF assets under management (AUM) have nearly doubled year on year.

In rupee terms, ETF holding surged by ₹19 billion ($227 million). This was off the record pace in January but still far above average.

This occurred despite significant ETF redemptions, reflecting some profit-taking as gold prices surged. 

A World Gold Council spokesperson said there is a shift from gold jewelry to "pure investments," redirecting "free cash flows" toward ETFs in the midst of “ongoing global and domestic economic and policy uncertainty.”

According to Metals Focus, "The weakness in Indian equities is the big reason for investors rotating into ETFs.”

That's not to say investors are spurning physical gold. According to the World Gold Council, bar and coin demand has also remained strong, even as jewelry sales have dropped due to high prices and significant premiums. 

Analysts told the Financial Times that the quick rotation out of stocks could account for the rapid increase in gold ETF holdings. Their electronic nature makes it possible to quickly shift money in and out of gold without having to physically move metal. Analysts also said, "The lack of new sovereign gold bond issuance by the Indian government and increased demand for multi-asset funds that include gold ETFs."

However, depending on ETFs as a gold investment introduces significant counterparty risk. While the investment class takes advantage of the convenience of ETF investing, the vast majority of Indians will likely stick to physical metal to preserve their wealth.

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