Chintan Haria, Principal – Investment Strategy at ICICI Prudential Asset Management Company, said recent allocations to gold and silver ETFs and fund of funds (FoFs) reflect both macro concerns and structural shifts in how investors use precious metals in portfolios.
Price surge, but flows continue
“In INR terms, over the past year — approximately January 2025 to January 2026 — domestic gold prices have risen around 60–70%, while silver has gained well over 100%, depending on the cut-off date,” Haria said.
Despite such sharp gains and intermittent price swings, investors have continued to allocate. Haria attributed this to elevated macro risks, including geopolitical tensions, energy supply uncertainty, currency volatility and pockets of slowing global growth.
“In such an environment, investors seek capital preservation over growth, which is achieved through investment in gold,” he said. Gold, he added, is typically treated as a portfolio hedge or diversifier, prompting higher allocations during periods of heightened volatility.
Silver, while more volatile than gold, tends to amplify moves in strong cycles and also benefits from its industrial demand profile.
Central bank demand as structural support
Haria pointed to sustained global central bank buying as a key structural driver.
“The trend seen in global central banks diversifying reserves into gold is creating a strong underlying demand floor. It also creates a perception of reduced downside panic,” he said. Retail and institutional investors interpret this as long-term validation of gold’s role as a reserve asset, reinforcing confidence during corrections.
He also noted that gold and silver are sensitive to real interest rates. Expectations of lower real rates and a softer US dollar could remain supportive for precious metals, as the opportunity cost of holding non-yielding assets declines.
ETF and FoF structure lowers entry barriers
Beyond macro drivers, product design is playing a role in sustaining flows.
Haria said ETFs offer intraday liquidity and transparent pricing without storage risk, while FoFs enable systematic investment plans (SIPs), making staggered allocations easier for retail investors.
“These factors make it easier for investors to stick with allocations through volatility,” he said.
Expense ratios and tracking efficiency matter
While allocation decisions may be driven by macro themes, Haria emphasised that long-term outcomes depend on costs and tracking quality.
“The higher the expense ratio of an ETF tracking gold or silver prices, the more it eats into investor returns. A lower expense ratio is therefore welcome from an investor’s perspective,” he said.
On tracking error, Haria explained that it measures how consistently an ETF’s returns stay close to its benchmark. “A lower tracking error means that the gold or silver ETF is tracking the underlying precious metal’s prices very closely without major deviations,” he said. However, he clarified that tracking error indicates “how consistently,” not “how much” — for which investors should examine tracking difference.
Why AUM deserves attention
Haria also described assets under management (AUM) as an important — though not exclusive — filter when selecting gold or silver ETFs and FoFs.
Higher AUM generally indicates more investors, stronger trading volumes and tighter bid–ask spreads, allowing investors to transact without significantly impacting prices.
“In low-AUM ETFs, even a ₹5–10 crore order can distort pricing,” he said, adding that investors should also review average daily traded volumes and typical spreads.
Larger AUM can also help spread fixed costs such as storage, insurance, trustee and custodian fees across a broader base, potentially enabling more competitive expense ratios. Over 10–15 years, even a 0.30–0.50% difference in annual expenses can compound meaningfully, he noted.
In addition, higher AUM may support more efficient bullion procurement and closer benchmark replication, potentially reducing deviations compared with smaller funds that may face operational constraints.