India Gold ETFs dismal; hold only 5 tonnes of gold

Nearly two years after India launched the Gold Exchange Traded Funds (ETFs), gold collections by the five gold funds in the country have been dismal. India’s Gold ETFs hold just over 5 tonnes of gold whereas Indian households own about 15,000 tonnes of gold, comprising around 10 per cent 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 funds in the country has been below average. In Europe and US, gold ETFs have been doing wonderfully well supported by investment demand, with holdings on the ETF hitting another record on safe-haven buying driven by chaos in the banking sector. Gold ETFs track the spot price of gold and are listed on stock exchanges.

Why is it that India’s Gold ETFs continue to be sluggish? Analysts say although redemption has been marginal, India’s Gold collection under exchange traded funds edged lower and this has not really helped the funds.

“The Exchange traded fund lost about 4.3 percent on the month to 5.3 tonnes in December. The Gold Benchmark Exchange Traded Scheme (GBES.NS) on National Stock Exchange closed at Rs 1,316.89 per gram, down 7.6 percent from its all-time high of Rs 1,425 per gram struck in mid October,” said Manasee S. Gokhale, economist and analyst with the National Commodity and Derivatives Exchange (NCDEX).

Benchmark Mutual Fund launched the first gold ETF in India in March, 2007. At present, there are five players in the market, namely, Benchmark, Kotak, Quantum, Reliance and UTI.

Benchmark holds 2.07 tonnes of gold, where are UTI has 1.36 tonnes, Reliance Capital 1.49, Kotak 0.36 and Quantum .05.

Though Gold collections under the ETFs are growing year on year, they remain negligible when compared to India’s imports of around 700 tonnes annually.

Although prices in December have been range bound between Rs 12,500 to Rs 13,500 per 10 grams and not very erratic, they have been very fluctuating. A rally has hence been absent for long as prices climb and are soon pulled down by lackluster demand.

December began with high prices as the wedding season was in process and Gold is an integral part of an Indian wedding. But neither the auspicious days nor the recent shuddering Bombay blasts could catalyse a rally in Gold prices. We have been talking about the absence of a Gold rally since November and are still waiting to see one.

The main problem for rapid growth of gold ETFs in India is said to the lack of awareness and complicated investment norms. Moreover, people still find charm in holding physical gold. The five gold ETF funds put together hold just above five tonnes of gold. According to the World Gold Council, Indian households own about 15,000 tonnes of gold, comprising around 10 per cent of global stocks.

As opposed to the Indian scenario of falling ETF’s, ETF holdings abroad continue to rise, with investors adding to the pool with 32 tonnes of Gold in December.

Looking back at the year 2008, the overseas holdings in the ETFs increased 285 tonnes to 1,155 tonnes. When compared to the increase of 266 tonnes in 2007 one finds an interesting detail. The fact that the rise has been almost similar to 2007 despite two bouts of heavy redemption selling that was seen in April/May 2008 and in September 2008.

ETFs track the performance of a particular index; their base price is basically equivalent to the value of the index. ETFs are not limited to gold. There are ETFs of almost all metals and most-traded agro-commodities. Eg: Gold, silver, copper, wheat, corn, cotton etc. At present, in India gold is the only commodity ETF.

source: Commodity Online