New Delhi: Consumers in India have long valued gold in all its glittery splendour, but the country’s financial sector is hoping surging prices can finally lure more people into investing in gold-backed paper.
The sector is set to launch 2-3 new gold-backed, exchange traded funds over the next six months, industry officials say, so investors can participate in the metal’s bull run.
With the launch of the latest ETF by Reliance Capital Asset Management, India’s largest mutual fund, there are now four gold-backed funds to invest in.
The gold behind the funds has risen to 4.7 tonnes from over 3.0 tonnes at the end of October and 2.73 tonnes in May.
India is the world’s largest buyer of physical gold and the elaborate high quality jewellery is tightly interwoven with the country’s culture. There has, however, been much doubt whether the country would ever embrace gold as an investment vehicle in a big way.
“Our estimate is that 5% of India’s gold demand, which is about 40 tonnes, should come from ETFs in the next 12 to 18 months,” said S Kannan, associate vice-president of Kotak Commodities.
He said the change was expected as investors were beginning to break away from their traditional view that gold was a savings instrument, only to be sold during times of distress.
“There is a metamorphosis happening gradually,” Kannan said. “It is one of the most effective vehicles for riding the bull run in gold.”
Another analyst said that he saw the present volume and investments are likely to grow by 50 to 75% in the coming year.
“The awareness level is increasing,” said Ashok Mittal, vice president and country head for the commodity brokerage of Karvy.
Indian customers thronged jewellery shops during the festive Diwali season this month, but many walked away empty-handed or with a fraction of their usual purchases because of high prices.
Gold prices came close to toppling the 1980 record high of $850 this month but have since dropped back to around $800 an ounce. But gold is still pricey for many looking to buy jewellery sets for festivals and marriages.
“Slowly, people are realizing the value of paper gold,” said Debashish Mohanty, country head of the retail network at UTI Asset Management Company, which runs a gold ETF.
“If you go to a reputed jeweller to buy gold, you always pay a premium,” he added. “But in exchange traded funds, it always replicates the international price.”
Mohanty said that the advantage of not having to worry about securing your gold or the metal purity was expected to attract the rising number of salaried investors in cities.
UTI Asset Management was in the process of tying up with some banks to help expand their ETF client base, he added.
“The investor sentiment is quite strong in favour of gold. Now they understand that there is another class of asset available,” said Gnanasekhar Thiagarajan, director at Commtrendz Risk Management.
“Clearly, the ETF market is slowly panning out to be a decent alternative to an investor now,” he added.
Those looking to make a quick profit may invest in the paper investment rather than jewellery, as Indian households often get emotionally attached to gold given to them on special occasions, Thiagarajan said.
But analysts say the long-term fundamentals are bullish and the metal’s price could touch $900 an ounce by March.
“As we go ahead, people will realize the value of ETFs,” said Vikram Dhawan, head of commodities, Reliance Mutual Fund. “After all, it took one-and-a-half years in the West to popularize. It is still early days here.”
Reliance Capital Asset Management collected over Rs150 crore for its gold ETF this month. It is to be listed by end of November.
Industry officials said that not many rural investors, who account for 60% of India’s gold demand, would immediately invest in ETFs because of the need to have a trading account.
But even if demand picks up in the cities, it would still boost volumes.
“Our aim is to first capture the urban markets,” Mohanty said. “Once that happens, it will spread fast.”