Record outflow from gold ETFs on profit-booking in Aug

Net outflow of Rs 588 crore as investors resort to speculative selling ahead of expected fall

Gold is losing sheen for investors who’d been reaping good returns in recent years through exchange traded funds (ETFs). In August, when India's overall gold import slipped to a several-year low of eight tonnes, gold ETFs witnessed a record net outflow of Rs 588 crore.

Those in the segment said it was speculative selling. “There were unprecedented redemptions in gold ETFs through last month. I can relate it with a sudden jump in gold prices on the back of the steep rupee depreciation, which made investors book profits,” says the chief executive officer of a mid-sized fund house with a gold fund. Last week, gold prices in India surpassed Rs 34,000 for 10g.

Of the eight months in the current calendar year so far, six saw negative flows; August was the biggest. Interestingly, the large outflows from gold coincided with positive flows into equity funds.

Amid higher redemptions, investors seem to have chosen to eschew any further investment in gold ETFs. The Association of Mutual Funds in India says sales were a mere Rs 6 crore in August, a several-year low.

Says the chief marketing officer of a large fund house, "Investors who missed getting out at earlier peaks and got stuck were quick this time to exit to make up the notional loss." Prices had been cracking till a few months earlier. The fall was sharp and in a matter of weeks, gold had declined a little over 10 per cent. This had also raised possibilities of a further fall till Rs 20,000-22,000 for 10g. However, it bounced back due to the weakening rupee, at almost the same pace as the earlier fall.

According to market participants, there is fear that the US Fed's likely announcement of a tapering in its quantitative easing programme might impact gold. So, before the event, investors chose to exit their investment.

As on end-August, the assets under management of gold ETFs was Rs 11,828 crore or one per cent of the mutual fund sector’s total AUM of Rs 7.66 lakh crore. There are 14 gold-based schemes on offer to investors.

The Reserve Bank of India’s (RBI) restrictions on import of gold had hit gold exchange traded products. Fund managers are finding it increasingly difficult to find physical supply of gold needed to deploy inflows into such schemes.

Also, the surging premiums in domestic gold prices (compared to international prices) coupled with the weak rupee added to the woes of fund houses operating gold ETFs.

“Most sources to deploy funds into gold funds have been virtually cut off. Earlier, we could buy from banks or authorised agencies but now they can only sell to jewellers. State trading houses import only for exporters. The only option left is jewellers — but that’s very difficult,” said an official with a fund house.