How Gold Spot Prices traversed in last 1 year ($ per oz)
Gold had been in the midst of a rally since late 2018 when the global markets had started becoming richly valued. Through 2019 and the first half of 2020, gold remained the best performing asset class. Geopolitical and economic uncertainty favours gold demand as investors consider it a safe haven in difficult times. From late 2019 to mid-2020, the demand for gold spurted due to the COVID pandemic which triggered the risk that global economies could slow down in tandem. However, things did change after August 2020 for gold.
By Aug-20, US bond yields had bottomed out around 0.51% and the global economy showed signs of an early recovery. While 2020 was going to be a year of negative growth, IMF and World Bank started building frenetic growth in the world economy in their 2021 and 2022 estimates. This led to a sharp rise in US bond yields, which spiked from 0.51% in Aug 20 to 1.76% in March 2021. As bond yield started rising, the opportunity cost of holding gold increased leading to a sharp 21% fall in gold prices. Gold is still about 18% below its August peak. But did that really hurt the investment interest in gold?
Gold price fall did have an impact on gold demand?
If you look at FY21, the total purchases of gold in investment mode (RBI Gold Bonds + Gold ETFs) stood at Rs22,968cr. Out of this, Rs14,598cr came in the first half of the fiscal while Rs8,370cr came in the second half. Clearly, there was a fall in investment gold flows in the second half with 64% of the flows coming in the first half and 36% coming in the second half. Is this applicable to both gold classes?
Let us look at RBI gold bonds first. During FY21, total inflows from RBI gold bonds was Rs16,049cr. Out of this, Rs10,131cr came in the first half of the fiscal and Rs5,918 crore in the second half. That means; 63% of full year flows came in the first half and 37% in the second half. What about gold ETF flows? During FY21, total inflows from gold ETFs was Rs6,919cr. Out of this, Rs4,467cr came in the first half of the fiscal and Rs2,452cr in the second half. That means; 65% of the full year flows came in the first half. In short; the overall trend for gold was that the enthusiasm tapered once the prices started falling.
What makes us confident that gold has emerged as an asset class?
Comparing gold flows within the year can give us short-term trends but not the long-term picture. A look at gold flows over the last few years would be better. Let us look at gold ETFs first. Between FY13 and FY18, gold ETFs saw net outflows in all years with FY12 being the last year of positive flows into gold ETFs. Even in FY20, the gold ETF flows were Rs1,613cr. So, the gold ETF flows of Rs6,919cr in FY21 represents a 328% growth yoy.
What about RBI gold bonds? These bonds commenced only in 2015, so we look at RBI gold bond flows only from that point. Since FY15, gold bonds had total collections till date of Rs25,695cr. Out of that, Rs16,049cr, or 62.5% of the total historic flows into RBI gold bonds, came in FY21. Gold bond value gets impacted by the elevated price of gold, so let us also look at quantum of gold invested through this route.
Since the RBI gold bond scheme began in 2015, a total of 63,307 KG of gold has been sold via these bonds. Out of that 32,352 KG or 51% of the gold quantity sold via RBI bonds was sold in FY21. It clearly shows that FY21 was perhaps the year when gold really emerged as an investment class.
Flows in FY22 will be the acid test
As the number of demat accounts in India proliferate, investors are increasingly seeing the merits of holding gold bonds or gold ETFs in their demat account. It is simple, inexpensive and also extremely liquid and flexible. Even financial planners are asking investors to allocate 10%-15% of their overall portfolio into gold in digital form to give the portfolio protection and stability. That is the way it should be and if FY22 can even repeat the performance of FY21, it would be a signal that gold has emerged as an asset class in India.