Why in news?
Gold investments in the form of gold backed exchange traded funds (ETFs) witnessed a huge jump in the first three months of 2020, even as jewellery demand took a significant hit on account of the global COVID-19 pandemic that led to lockdowns in most countries.
As per the latest Gold Demand Trends report by the World Gold Council, global gold demand held firm in the first quarter of 2020 at 1,083.8 tonnes, a rise of 1% compared to the corresponding period last year.
Why is this happening?
- The global COVID-19 pandemic fuelled safe-haven investment demand for gold, with gold-backed ETFs attracting huge inflows (+298 tonnes) to push global holdings in these products to a record high of 3,185 tonnes.
- The pandemic slashed jewellery demand as global governments have imposed lockdown measures.
- However, central banks continued to buy gold, though at a much slower pace, as global gold reserves grew by 145 tonnes in the first three months of 2020.
- Sharp investment inflows helped push the gold price in dollar terms to an eight-year high following which the demand in value terms reached $55 billion, the highest since the second quarter of 2013.
What are Exchange Traded Funds (ETFs)
- Exchange Traded Funds (ETFs) are mutual funds listed and traded on stock exchanges like shares.
- In an ETF, one can buy and sell units at prevailing market price on a real time basis during market hours.
- ETFs are cost efficient – Given that they don’t make any stock (or security choices), they don’t use services of star fund managers.
- A gold ETF, or exchange-traded fund, is a commodity ETF that consists of only one principal asset: gold.
- However, the fund itself holds gold derivative contracts that are backed by gold. So, if you invest in a gold ETF, you won’t actually own any gold.