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The inside story of gold

In spite of the rally in gold prices since 2007, gold ETF investors have made paltry returns due to their unwillingness to stay invested

Gold ETFs started with much fanfare in 2007. In a country obsessed with gold, it was thought that gold ETFs would be a game-changer and would provide an additional way for Indians to satisfy their hunger for gold. Being a financial instrument, ETFs were expected to bring money into the financial system. This would have mitigated the problem of a lot of money tied up in physical gold. Indeed, the hopes weren't absolutely unfounded as gold ETFs once commanded assets under management of over 12,000 crore, in January 2013. Gold prices also climbed from a level of ₹9,000 per 10 gm to a peak of ₹31,500 since the inception of gold ETFs. Gold prices are currently hovering about ₹25,000 for 10 gm. So, if an investor had invested in gold ETFs in 2007, at the time of their launch, in eight years, he would have made a compounded annual return of about 14 per cent. Not bad. But let's have a look at the reality.

Gold has seen highly erratic inflows and outflows. So, while 14 per cent returns look reasonable, they aren't valid for gold investors in general. In order to find out the returns made by gold investors since the time gold ETFs were launched, we found out the monthly net flows (inflows minus outflows) into gold ETFs since April 2007. The current AUM of gold ETFs stand at over ₹6,500 crore. Calculating the internal rate of return based on the price of Goldman Sachs Gold ETF, we discovered that gold investors have made just 5.14 per cent returns. These returns are less than even the rate of inflation. Over the same period even liquid funds have returned over 7 per cent. So, while gold prices have come down lately, long-term investors are still winners. Those who came in and out of their gold investments have a reason to be regretful.

The inside story of gold