Gold and silver ETFs: The new-age alchemists spinning wealth in 2024

Where investors find philosopher's stone, with Rs 19K crore inflow in first 11 months of CY 2024

Gold and silver exchange-traded funds (ETFs) saw an extraordinary rise in demand during the calendar year (CY) 2024, driven by higher prices and favourable tax adjustments.

 

In the first 11 months of CY 2024, investors poured nearly Rs 19,000 crore into gold and silver ETFs, compared to Rs 9,485 crore in CY 2023, according to data from the Association of Mutual Funds in India.

 

The rally in gold and silver prices this year was shaped by multiple factors, primarily central bank policies and geopolitical tensions, experts say.

 

“A range of other dynamics, such as supply-demand imbalances and domestic market conditions, have influenced the price movements of these metals,” noted Motilal Oswal Financial Services (MOFSL) in a report.

 

The price rally led gold ETFs to their strongest performance in four years, with domestic gold ETFs gaining around 20 per cent over the past year. In the past decade, the highest returns for gold ETFs occurred in 2020 (26.5 per cent) and 2019 (22.5 per cent).

 

Silver prices also saw growth in 2024, with ETFs delivering a return of roughly 17 per cent in the same period.

 

Several other factors contributed to the increased demand. 

 

Under new tax provisions introduced in the Union Budget, gains from gold ETFs are subject to a 12.5 per cent long-term capital gains (LTCG) tax if held for a year. The reinstatement of the LTCG benefit, which had been removed in April 2023, has further increased the appeal of ETFs. The absence of new issuances of sovereign gold bonds also played a role in the rise in interest.

 

The outlook for CY 2025 is uncertain for both metals. Analysts suggest that while some demand drivers are weakening, the possibility of Donald Trump’s return to power in the US introduces new unpredictability.

 

“Several factors that supported gold’s rally have moderated. Diplomatic efforts for ceasefires in conflict zones like Russia-Ukraine and Israel-Hezbollah, along with President-elect Donald Trump’s escalated push for international agreements, have tempered the demand for precious metals as a safe-haven asset,” Emkay Global noted in a report.

 

However, “positive signals have emerged, with China resuming gold purchases after a six-month hiatus, positioning itself as a key buyer”, it added.

 

MOSL, in its outlook, expressed optimism about gold, predicting price increases in the medium-to-long term.

 

“Looking ahead, the outlook for gold and silver remains optimistic, although some market consolidation or short-term dips may present buying opportunities. A loose monetary policy environment, coupled with ongoing geopolitical risks, should continue to create a favourable backdrop for gold and silver. Central banks’ continued support for their economies, combined with persistent demand for safe-haven assets, suggests the upward momentum in these metals could continue,” it said.

 

Experts also point out that investing in gold serves as a hedge against the rupee’s depreciation against the US dollar.