MUMBAI: India’s gold demand may rise by as much as 100 tons in three years as mutual funds prepare to sell securities backed by the precious metal, likely boosting prices, according to Kotak Commodity Services Ltd.
While Benchmark Asset Management Co. will today close its gold-backed fund, the first such offering in the world’s biggest user of the bullion, five money managers including Prudential ICICI Asset Management Co. are set to launch similar products.
Expansion in China and India, the world’s fastest-growing economies, has fueled demand for commodities and raised interest from institutional and individual investors. Gold reached a 26- year high of $730.40 (Rs32,311) an ounce on 12 May. Prices in New York rose to a nine-month high yesterday, while Tokyo gold futures reached a 21-year for a second day today.
“Gold exchange-traded funds can create an estimated 90 to 100 tons spread over the next three years, contributing about 5% to the incremental demand from India,” Kotak Commodity analyst Sahil Kapoor said in a report yesterday. Demand by funds can “boost the yellow metal prices.”
Gold for immediate delivery dropped as much as $4.20, or 0.6%, to $673.25, and traded at $677.55 an ounce at 3:41 p.m. in Mumbai. Before today, gold had risen 23% in the past year, according to Bloomberg data.
The exchange-traded funds, known as ETFs, enable investors to trade bullion without taking physical delivery of it. ETFs have become popular since their creation in 1993 as they widened investors’ access to different type of assets.
Investments in gold-backed ETFs, like in stock funds, are exempted from long-term capital gains tax if they’re held for more than a year. Gold attracts wealth tax on physical holding of above Rs1.5 million, according to Kotak.
Households in India have 15,000 tons of gold worth $200 billion locked away in family vaults, according to consultant McKinsey & Co. Investment demand for bullion in India, which uses more gold than the US and China combined, was estimated to have risen 40% to 185.6 tons in the past two years, according to the Kotak report.
“Gold ETFs the world over has been successful in bringing reluctant investor to the bullion markets,” Kapoor said. “We expect gold ETFs to do well over a period of time contributing substantially to the gold demand in India.”
Prudential ICICI, 49% held by Prudential Plc, the U.K.’s second-biggest insurer, UTI Mutual Fund, India’s biggest money manager, Kotak Mahindra Asset Management Co., Tata Asset Management Co. and Birla Sun Life Asset Management Co. plan to launch gold ETFs, according to the Securities & Exchanges Board of India, the nation’s stock market regulator.