What’s the story
Gold exchange-traded funds (ETFs) have witnessed a massive surge in investor interest this year, with some delivering returns as high as 72%.
The trend is largely driven by the stellar performance of gold and silver, which have outperformed equities and cryptocurrencies.
In November alone, gold ETFs saw net inflows of ₹3,741 crore according to AMFI data.
Gold ETF rally: Sentiment-driven or fundamentally sound?
The current gold ETF rally is a mix of sentiment and fundamentals.
Investors have flocked to ETFs in anticipation of lower global interest rates and safety, pushing gold prices up faster than traditional fundamentals would suggest.
However, Akshat Garg from Choice Wealth argues that the demand environment and structural tailwinds remain strong, with central banks still accumulating gold amid a weak US dollar.
Factors influencing future gold ETF performance
Analysts believe that the future performance of gold ETFs will be influenced by several factors.
These include clear signals of rate cuts or softer real yields, sustained ETF buying, weakness in the US dollar, and the gold-silver ratio.
Last week, the US Federal Reserve cut rates by 25 basis points for the third time this year.
Sustained ETF buying and dollar weakness boost gold prices
Sustained ETF inflows are tipped to keep gold prices elevated as every wave of buying tightens the supply and pushes prices higher.
So far this year, gold ETF inflows have swelled to $378.7 million, according to the World Gold Council report.
Meanwhile, a weak US dollar has made bullion more attractive for overseas buyers, further boosting demand for gold.
Risks and volatility in gold ETFs
The biggest risk for gold ETFs is a macro surprise, such as stronger-than-expected global growth or sticky inflation that could keep interest rates high. This would be negative for gold and silver.
Another risk is the nature of ETF-driven rallies where crowded positioning can trigger sharp corrections even with small profit-taking.