India Wants Gold, Not ETFs

Indian Gold Investment has shunned the new Gold ETFs, giving them just 5 tonnes all told...

NEARLY TWO YEARS after India launched its first Exchange-Traded Gold Funds (ETFs), gold collections by the five gold funds have been dismal, reports Commodity Online in Mumbai.

India's Gold ETFs hold just over 5 tonnes of Gold Bullion, whereas Indian households own about 15,000 tonnes of the metal, comprising around 10% of global stocks of the yellow metal.

India is the largest consumer of gold in the world. But the performance of the five companies that have launched Gold ETFs in the country has been below average. In Europe and US, gold ETFs have been doing wonderfully well, supported by institutional investment demand, with holdings on the New York trust-fund hitting another record this week above 800 tonnes on safe-haven buying driven by chaos in the banking sector.

Gold ETFs are designed to track the Spot Gold price, listing on major stock markets and giving investors "securitized" exposure to the price alone, rather than any physical ownership. Annual fees – deducted from the value of gold content "backing" each share – typically run to 0.40% per year.

Given the international success, why is it that India's Gold ETFs continue to be sluggish?

"The exchange-traded fund lost about 4.3% of its holdings on the month to 5.3 tonnes in December," says Manasee S. Gokhale, economist and analyst with the National Commodity and Derivatives Exchange (NCDEX).

Tracking the Indian Rupee price last month, "The Gold Benchmark Exchange Traded Scheme (GBES.NS) on National Stock Exchange closed at Rs 1,316.89 per gram," he goes on, "down 7.6% from its all-time high of Rs 1,425 per gram struck in mid October."

Benchmark Mutual Fund launched India's First Gold Fund in March 2007. At present, there are five players in the market – Benchmark, Kotak, Quantum, Reliance and UTI.

Benchmark holds 2.07 tonnes of gold, whereas UTI has 1.36 tonnes, Reliance Capital 1.49, Kotak 0.36 and Quantum 0.05. And although Gold Bullion collections under the ETFs are growing year-on-year, they remain negligible when compared to India's imports of around 700 tonnes annually.

Prices in December were range-bound between Rs 12,500 to Rs 13,500 per 10 grams (the standard Indian weight for gold), and remain erratic – although sharply higher – in January 2009. Demand for physical gold jewelry and retail-investment items remains "lackluster" according to local dealers. The problem is much greater for the ETFs.

December began with high Gold Prices as the wedding season was in full swing, and Gold is an integral part of any Indian wedding. But neither the auspicious days of the Hindu calendar, nor the recent shuddering Bombay blasts, could catalyze a rally in the local Gold Prices. It's taken the sharp rise in Dollar prices since mid-Jan. the force higher rates.

Looking back at 2008, Gold ETFs outside India increased their gold holdings by one-third to 1,155 tonnes. When compared to the increase of 266 tonnes in 2007, it's interesting to note that the growth by volume – some 285 tonnes – remained steady despite two bouts of heavy redemption selling seen in April-May 2008 and again in Sept., as the collapse of Lehman Brothers caused "forced liquidation" across all asset classes besides the US Dollar and Japanese Yen.

Looking ahead to Gold in 2009, the main problem for rapid growth in Indian gold funds remains a lack of awareness. Unlike foreign markets, India's ETFs are currently limited to gold, rather than extending to other metals and tradable commodities such as silver, oil, copper, wheat, and cotton. Plus the relatively complicated investment structure seems to hampering growth.

People still find appeal in owning physical gold instead. ETFs only "track" the performance of a particular index.