Investors see more sheen in paper gold this year amid lower prices

So far, FY21 has seen sale of 32.4 tonnes worth of sovereign gold bonds and 13 tonnes of exchange-traded funds

Paper gold has gained strong traction with investors this year, given the high sales of sovereign gold bonds (SGBs) and exchange-traded funds (ETFs).

In FY21, the Reserve Bank of India (RBI) raised Rs 16,049 crore through sales of SGBs equivalent to 32.4 tonnes.

The next issue of SGBs is expected next financial year.

Considering the estimates of gold sold through ETFs, investment in paper gold is estimated at over 46 tonnes in FY21.

Compare this with the estimated physical gold demand for investment in FY21 at around 135 tonnes (demand at 102 tonnes in April-December). It appears that a fourth of the physical demand has been diverted to SGBs this year.

Even the older form of paper gold — gold ETFs — has seen a net inflow of Rs 6,062 crore (12.9 tonnes) in FY21 till February.

FY21 is the second consecutive year to see a rise in investment in gold ETFs. Market experts estimate the current year could end with 14 tonnes worth of inflow into ETFs.

ETF holding is part of physical gold demand, according to the data released by the World Gold Council. However, investors buy securities when they invest in ETFs and they are a form of paper gold.

Chirag Sheth, principal consultant, India and South Asia, Metal Focus, said: “SGBs are now part of mainstream gold investment. The pandemic has surely brought gold to the forefront and the lockdown has forced many to look at paper instruments. We expect demand for SGBs to continue to remain robust.”

SGB sales of 3.23 tonnes in March have been the highest in the past six months after the August issue when bonds worth 6.35 tonnes were sold — the highest ever.

More strikingly, the response to SGBs in FY21 — at 32.4 tonnes — is not only the highest in the past five years since the scheme was launched (November 2015), but is also more than the combined sales in the past five years. Between FY16 and FY20, gold bonds worth 30.9 tonnes were sold.

Most experts believe that a better response to SGBs in March is because of corrections in the price of the yellow metal. The volatile stock markets have also helped gold demand. Lower prices have attracted investors towards gold bonds despite March being the traditional month for tax planning.

In comparison, the combined domestic demand for jewellery and gold bars & coins saw a decline in FY20 to 633 tonnes from 768 tonnes in the previous year, and FY21 could be the second consecutive year of decline. In the first nine months of FY21, this figure stood at 344 tonnes.

Will gold prices fall further?

A consistent fall may keep off opportunistic investors while attracting value investors. Rising bond yields in the US, which is seen as a negative for gold, has led to fears of gold prices falling. Fears of inflation are also emerging.

US-based market expert Nigam Arora, founder and chief investment officer of The Arora Report, said gold was facing several threats, which have impacted its attractiveness currently. According to him, the rising popularity of bitcoin is one of the prominent threats. Gold is sensitive to interest rates. In the scenario of rising interest rates or yields, bonds are providing significant competition to gold.

He said bitcoin supporters said the glory days of gold were behind us. They are succeeding. A significant amount of money has flowed out of gold and into bitcoin. Going ahead, too, the new money that would have normally come into gold is likely to go into bitcoin.

Gold is used as a diversifier to equities and the yellow metal loses lustre when equities rise. Gold is also a hedge against inflation, and central banks have managed these expectations so far.

Despite all threats to gold price, Arora said, “Smart money keeps on accumulating gold on dips. Hence, investors can side with the smart money and accumulate gold on dips.”