Written by Mike Mahary
Indians have a strong affinity for gold and silver. This has traditionally been expressed as a demand for gold and silver jewellery, along with bars and coins. But last year, gold and silver exchange-traded funds (ETFs) experienced incredible growth.
In the simplest terms, an ETF represents a basket of investments that trade in the market as a single entity. For example, a gold ETF is backed by a trust company that holds the metal, which the trust company owns and stores. In most cases, investing in an ETF does not entitle you to physical gold or silver. (There are exceptions.) You own the shares in the ETF, not the metal itself.
ETFs are a convenient way for investors to play in the gold and silver markets, but owning ETF shares is not the same as owning physical gold or silver.
Gold inflows into ETFs can boost overall demand and have a significant impact on the global gold market.
India gold and silver demand in 2024
Despite gold and silver prices at record levels, India's demand for both metals remains strong through 2024.
The Indian government cut import taxes on gold and silver by more than half in July, lowering customs duties from 15% to 6%. The move initially caused prices to fall by about 6%, but led to a record increase in gold imports in August. Falling prices increased demand for both metals.
Despite the reduction in import duties, gold and silver prices have increased significantly in rupee terms. According to Metals Focus, gold has soared 20% this year, touching Rs 80,000 per 10 grams in the process. Silver prices rose 17% and briefly crossed the psychologically important Rs 100,000 per kg mark.
While Indian buyers tend to be price-sensitive and there is no doubt that higher prices are causing some headwinds to retail demand, Metals Focus says the price increase isNew investment has gathered amid expectations for further price rises”
Demand for gold bars and coins reached 163 tonnes in the first nine months of 2024, an estimated 38% year-on-year increase. This is the highest level since 2013.
Meanwhile, investment demand for silver increased by an estimated 15% to 1,766 tonnes. This is the second highest level since 2015.
Indian gold ETF makes a comeback
Gold and silver ETFs are a relatively new phenomenon in India. The first Indian gold ETF was launched in 2007 and the first silver fund was launched in January 2022.
Gold ETFs initially failed to attract meaningful flows. According to Metals Focus, this was due to two factors.
- Lack of investor awareness
- Preference for physical metal.
India's gold ETF holdings initially peaked at 40.8 tonnes in 2013. As the Great Recession faded, lukewarm interest in ETFs waned further, with holdings in gold-backed funds dropping to just 14 tons in 2019.
The introduction of sovereign gold bonds (SGBs) in 2015 was a drag on ETF investing. Government-issued securities are denominated in grams of gold but are not backed by any physical metal. However, it is guaranteed by the government and has a yield of 2.5%. There are also tax benefits.
According to Metals Focus, SGB attracted 147 tonnes worth of gold investment, with much of the movement occurring post-pandemic.
“To put this in perspective, till March 2020, the Reserve Bank of India (RBI) had issued 37 tranches of these bonds, but only 31 tonnes of gold had been collected. March 2020 Since then, 30 tranches have been issued, bringing in 116 tonnes.”
The government did not issue SGBs in February 2024, which increased demand for ETFs.
Positive sentiment towards the yellow metal also supported gold ETF investing post-COVID-19. India-based funds' gold holdings increased from 19.4 tonnes in March 2020 to 54.5 tonnes as of October 2024. According to Metals Focus, “These inflows, although limited in tonnage, were driven by a variety of factors including the proliferation of retail trading accounts, multi-asset fund launches, and price-driven optimism.”
The pace of gold inflows has accelerated this year. India ETF holdings increased by 12 tonnes, the largest increase since 2020.
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While Indians' love for gold is well known, they also have an affinity for silver. According to Metals Focus, Indian investors 17,000 tons Amount of silver in the form of bars and coins over the past 10 years.
Indians not only view silver as a store of wealth, but also as a strategic investment option. As Metals Focus says, white metal has “Its tactical appeal is caused by its inherent variability. This is aimed at attracting new investors in India and potential price increases during the recent bull market.”
India-based silver ETFs have seen impressive growth since the first one was launched just over two years ago. Silver holdings exceeded 1,000 tonnes in August.
Silver ETFs currently represent approximately 40% of annual retail silver investments. This corresponds to about 5% of the gold ETF.
Silver's price performance and lack of competitive products are driving silver ETF growth, according to Metals Focus.
As Metals Focus pointed out, silver-backed ETFs also solve practical problems.
“Given the size of silver bars, storing the metal can be difficult for retailers. This problem has been solved with the launch of ETPs that allow investors to hold silver as securities in their trading accounts. Ta.”
Looking to the future
Metals Focus is planning both silver and gold ETFs in anticipation of metal inflows in India.
“This reflects an increase in investment managers recommending exposure to precious metals and growing awareness among investors for precious metals ETPs.As a result, India's share in global ETPs has increased. They are expected to increase significantly, currently at 1.6% for gold and 4% for silver.
