Gold Exchange-Traded Funds (ETFs)
Context:
Recent data from the Commerce Ministry and the World Gold Council highlights a significant shift in Indian investment patterns.
In January alone, Indian gold ETFs witnessed a record purchase of 15.52 tonnes of gold.
This surge in ETF investments has contributed to a sharp increase in gold imports, which tripled to $12.07 billion, pushing India's goods trade deficit to nearly $35 billion.
About Gold ETFs:
Gold ETFs are essentially mutual funds that invest in gold.
Gold ETFs are digital, where you own gold but not tangibly.
They function like passive investment funds that are based on gold prices and invest in gold bullion.
When an investor buys a Gold ETF, the fund management buys the corresponding amount of physical gold.
Advantages over Physical Gold:
Highly Liquid:
Gold ETFs are highly liquid.
As they are traded on exchanges like stocks, you can sell them during trading hours when you require money.
Purity and Security:
Investors are spared the trouble of verifying the purity of the metal or ensuring its physical security.
Flexibility:
Investors can buy gold in small amounts (units) and hold it in a dematerialized form, unlike physical jewelry or bars.
Trends in Household Savings:
There is a structural shift in how Indian households save.
Bank Deposits:
The share of bank deposits in households' financial assets fell from 35% in 2022-23 to 33% in 2024-25.
Equities & Mutual Funds:
In contrast, investments in mutual funds and equities more than doubled from 7% to 15% in the same period
Enduring Love for Gold:
Despite the move to financial assets, the preference for gold remains strong, now increasingly channelled through formal routes like ETFs rather than just physical hoarding.
Comparison with Sovereign Gold Bonds (SGB):
The SGB scheme was discontinued in early 2024.
Rapidly rising gold prices made the scheme too expensive for the government, which was paying nearly Rs 18,000 crore annually in interest and maturity payments.
Unlike SGBs, where the government did not import gold, but merely paid returns based on gold prices, ETFs require the actual import of physical gold, thereby directly impacting the trade deficit.