Gold and silver ETFs gain as geopolitical tension over Ukraine escalates

In the past one month, silver funds have returned 7.34%, gold funds on an average are up by about 6%. In comparison, Nifty is down 4%

Surge in the volatility across the globe due to the ongoing geopolitical situation in Russia and Ukraine has led to increase in prices of gold and silver–considered to be safe-haven investment bets.

In the past one month, silver funds have delivered returns of 7.34 per cent, while gold funds on an average are up by around 6 per cent. In comparison, the benchmark Nifty is down 4 per cent in the past one month.

Fund managers say precious commodities act as a good hedge against inflation and phases of geopolitical uncertainty. Further, given their inverse correlation with interest rates, there is room for the prices to remain elevated as global central banks embark upon their rate hike journey.

Earlier, investors were allowed to invest only in gold exchange traded funds (ETFs), but recently the market regulator Sebi also allowed fund houses to launch silver ETFs.

In the months of January and February, six schemes of silver ETFs and fund of funds (FoF) were launched by various domestic mutual fund houses.  

“The Ukraine crisis kicks off a new superpower struggle among the US, Russia and China. It could result in China following Russia and repeating Ukraine in Taiwan. Thus, one cannot rule out a geopolitical risk premium that gets built into gold prices. Also, there is a limit to sanctions the world can put on Russia without hurting itself, given Russia’s critical role in global commodity markets. The resulting volatility and uncertainty will keep gold relevant,” said Chirag Mehta, senior fund manager-alternative investments at Quantum Mutual Fund.

In the past one year, several of the gold ETFs have given returns of around 20 per cent, while in the last six months it is around 13.5 per cent, shows the data from Value Research.

MF players also say that silver is a versatile metal given its widespread usage in sectors like renewable energy, industries and electronics, jewellery besides being an investment avenue. Investors looking to invest in commodities can have 10-15 per cent exposure in such products.

“As long as the uncertainties pertaining to geopolitics remain, the yellow metal will continue to remain buoyant. From an investor's perspective, gold should be looked at from an asset allocation point of view, as the yellow metal acts as a hedge against volatility in financial assets,” said Chintan Haria, head - product development & strategy at ICICI Prudential AMC.