All That Glitters is Not Gold

May 13, 2013
We review the recent correction in gold prices and its impact on Gold ETFs
An edited version of this article was first published in Times of India on May 7, 2013 and is available here. The full article is carried below.

There is a well-known expression – “All that glitters is not gold”. It implies—not all that is precious is necessarily gold. As per Wikipedia, this popular expression is also derived from a line in William Shakespeare’s play ‘The Merchant of Venice’, although Shakespeare employs the use of the word ‘glisters’ in place of ‘glitters’.

Anyway, this age-old saying may have lost some of its impact in the minds of gold investors lately, especially after the battering that the precious metal has received recently. Gold received its ultimate bear-hug in mid April 2013, as the international gold price saw its biggest one-day decline since the 1980’s on April 15, 2013—dragging down the price of yellow metal by around 25% from its peak in August 2011. Indian gold prices also corrected heavily, but their fall has been less severe due to the depreciation in the Indian rupee.

Though this correction was long overdue, it must have taken several Indians aback. After all, we are the largest consumers of gold worldwide, and have got used to double-digit returns from this asset class over the past few years. With the free-fall in gold prices, the gold mongers pitching gold as a safe-haven asset class have also magically disappeared overnight.

Most of the gold demand in India is through the jewellery route. However, the investment demand for gold has also been building up slowly and steadily over the years through the medium of gold ETFs and gold funds. Gold ETFs have been around in the Indian market since early 2007, but they started gaining traction in 2010, after seeing two consecutive years of 20% (plus) returns in 2008 and 2009. At the end of 2007 there were only 4 gold ETFs with total assets of just Rs. 467 crores. The years 2008 and 2009 together pulled in a net Rs. 570 crores into gold ETFs. However flows picked up to Rs. 1,727 crores in year 2010, and total assets managed by gold ETFs swelled to Rs. 3,516 crores. The inflow in 2010 as a percentage of beginning assets (also known as organic growth rate) was a handsome 128% -- indicating that the net inflow during the year was higher than total assets managed at the beginning of the year.

The year 2011 saw the introduction of gold funds, which became a popular vehicle of investing into gold ETFs for those investors who did not have a demat account. Gold ETFs registered a strong inflow of Rs. 4,046 crores (organic growth rate of 115%) during the year 2011 despite these ETFs posting returns in excess of 21% in the previous year. However, inflows tempered down in 2012 to Rs. 1,826 crores (organic growth rate of 20%), and the category closed the year with around Rs. 12,000 crores in assets. A bulk of the inflows in 2012 came in during the second half of the year, and the recent fall in gold prices must be pinching these investors hard.


So will gold recover, or will it continue with its downtrend? Frankly, my guess is as good as yours. Commodities tend to have a long cycle, and once the cycle turns—the downtrend tends to continue for a while. Common sense suggests that you are not likely to see the same sort of blistering returns that gold has seen in the past, for a while now. You may see some buying support on dips initially, like being witnessed lately, but the precious metal seems to have lost its luster now. So if you are late bloomer—who has come in seeing the past returns of gold; read the writing on the wall—carefully!

Add a Comment
Please login or register to post a comment.
© Copyright 2024 Morningstar, Inc. All rights reserved.
Terms of Use    Privacy Policy
© Copyright 2024 Morningstar, Inc. All rights reserved. Please read our Terms of Use above. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
As of December 1st, 2023, the ESG-related information, methodologies, tools, ratings, data and opinions contained or reflected herein are not directed to or intended for use or distribution to India-based clients or users and their distribution to Indian resident individuals or entities is not permitted, and Morningstar/Sustainalytics accepts no responsibility or liability whatsoever for the actions of third parties in this respect.
Company: Morningstar India Private Limited; Regd. Office: 9th floor, Platinum Technopark, Plot No. 17/18, Sector 30A, Vashi, Navi Mumbai – 400705, Maharashtra, India; CIN: U72300MH2004PTC245103; Telephone No.: +91-22-61217100; Fax No.: +91-22-61217200; Contact: Morningstar India Help Desk (e-mail: in case of queries or grievances.