Yellow Metal: Should you book profits from gold ETF now?

Gold prices, after touching an all-time high of Rs 55,922 per 10 grams on August 7 in the domestic market (MCX spot), slid around 6% to Rs 52,688 on August 14, on the back of profit booking by traders. The NAV of all gold exchange traded funds (ETFs) too declined. The sharp price rise—around 50% in one year—drew a lot of investors to gold ETFs. This year till July, gold ETF category saw net inflow of Rs 4,452 crore. In July, gold ETFs saw net inflows of Rs 921 crore compared to Rs 494 crore in June. The AUM in gold ETF clocked Rs 12,941 crore, as on July 31, 2019, compared to Rs 5,080 crore in the same month last year, a growth of 155%.

Himanshu Srivastava, associate director, Manager Research, Morningstar India, says with its safe-haven appeal and as one of the better performing asset classes since 2019, gold ETF category has been gaining significant traction. “Considering the threat posed by the pandemic to the global economy and the markets, this segment may continue to gain traction from investors,” he says.

Drop in prices: What should investors do?

Experts say drop in gold prices is nothing unusual as no asset class can keep moving up in a straight line and there would be phases of correction and consolidation. The bull run in gold from 2000 to 2012 had seven reasonably sized corrections. Though the fundamentals are supportive of higher prices, the pace at which prices were increasing was a concern and the yellow metal was overdue for a correction.

So, does that mean investors should go for some profit booking now?

Omkeshwar Singh, head-Rank MF, Samco Group, says investors should go for profit booking depending on their exposure to gold. “Ideally, an investor’s exposure to gold in the total portfolio should be 10-15%. If it is more than this now, some part can be sold and profits realised,” he says.

Chirag Mehta, senior fund manager (Alternative Investments), Quantum Mutual Fund, says while there is a correction and sideways consolidation in the short term, gold holds strong potential over the long term as fundamentals are stronger than ever and the corrective windows are opportunities for those seeking to buy gold. “We recommend a 10-15% portfolio allocation to gold at all times. If rising gold prices have resulted in an increased allocation to the metal, investors can book profits and bring down the allocation to suggested levels. But in case of investors who don’t have adequate allocation to the asset class yet, the ongoing correction is a good entry point,” he notes.

Even the surge in gold prices provided some profit booking opportunity to investors of gold ETFs. The category witnessed net outflow of `31 crore in October last year and a net outflow of Rs 195 crore in March 2020. In fact, gold ETF scores over Sovereign Gold Bonds as investors can buy and sell gold ETFs during any working day of the stock exchanges.

Mehta of Quantum MF says the macroeconomic fundamentals underlying gold are extremely positive, suggesting a bullish trend for gold prices, going forward.