Banks dealing in bullion and importing houses in India might have put the brakes on importing gold in the country, but Indian investors just cannot keep away from gold. If not in the physical form in terms of jewelry, gold biscuits or gold coins, small investors, corporate houses in India and small and medium enterprises (SMEs) have decided to go a stage further and invest in paper gold.
The country's purchase of gold electronic-traded funds (ETFs) doubled in 2011 as corporates and SMEs invested heavily in what has been termed by retailers a traditional favorite of wealthy individuals and higher middle-class households in India.
The gold collections of ETFs have risen from 15 tonnes in 2010 to 30 tonnes in 2011—a 100% increase. The number of corporate portfolios under ETFs has also jumped, to 5,599 in 2011 as against 3,310 in 2010, according to published data.
Companies now account for nearly 50% of all ETF purchases in the country. For the first time, SMEs have invested in large numbers, traders said.
Analysts tracking the precious metal say despite increasing volatility in gold prices over the past few months, gold ETFs have witnessed a 20–25% rise in volumes as investors continued to look for innovative options to bolster their investment portfolios.
"Either which way, an investor in India wants some gold. Gold ETFs have caught investors' fancy for a number of reasons. Financial planners have been recommending gold as an alternative asset class for the portfolio, with most recommending investors to hold 5–10% of their portfolio in gold,'' said Maulik Shah, bullion retailer and investment planner.
Stating that gold ETFs have experienced a record high inflow in 2011, Shah added: "Gold is considered a safe bet by many and a hedge against inflation. It has proved to be a handy asset to diversify the overall portfolio.''
The jump in demand in India is all the more startling given the global fall in demand for gold ETFs. Globally, gold ETFs fell to a seven-year low in 2011, according to the World Gold Council, with the drop being attributed in part to profit-taking and rebalancing of portfolios.
According to the World Gold Council, inflows into gold ETFs have shrunk to almost half, from $14.47 billion (B) in 2010 to $7.78B in 2011. In India, high inflation in 2011 and increased familiarity with ETFs as an instrument by investors have driven demand for the better part of the year.
In India, the average price of gold per gram stood at $48.03 (2,362 rupees) in 2011, as compared to $36.60 (1,800 rupees) in 2010, an increase of 31%. In comparison, the sensitive index at the Bombay Stock Exchange fell nearly 25% last year. This was one of the main reasons for many portfolio managers advising their clients to reinvest in ETFs.
However, though the sensitive index rose 11% in January 2012, investments in gold ETFs kept pace and have risen by 50% over the corresponding month of the previous year, said an analyst.
In India, gold ETFs were launched in 2007 and are today the largest in Asia, with 13 gold ETFs and assets under management totaling $1.9B (9,614 rupees/crore) for the period ending January 2012.
A World Gold Council official pointed out that in a one-year time frame, all the gold ETFs schemes in India have generated a return in the range of 32.62% to 33.76%.
UTI's gold ETF generated the highest returns among schemes, said an analyst, adding that since none of the schemes have completed a lifespan of five years, UTI gold ETF continued to generate maximum returns to the tune of 27.16% over a period of four years.
Traders said while rising gold prices have dampened demand for jewelry in most quarters, gold ETFs will continue to witness explosive growth this year. Though India's gold ETF collections are miniscule, at just 30 tonnes against a national gold consumption of 933 tonnnes, the growing attractiveness of the yellow metal in paper form has got more companies raring to go with their gold ETF products.
Shivom Seth, Mineweb