India, the world’s largest gold consumer, is set to join the small group of countries having exchange-traded funds (ETFs), but strong cultural affinity with physical bullion may deter investors.
Such funds, trading on the world’s major stock exchanges and backed by physical metal, have accumulated about 600 tonnes of gold—a quarter of annual mine output— in the three years since they were first launched.
But analysts and consumers say ETFs may get a lukewarm welcome in India.
“An ETF is better if I am buying it as an investment product, but not as a gift for my daughter’s wedding,” Ondrila Banerjee, an Indian consumer, said. “I cannot make her wear paper gold on her wedding, can I?” India’s Benchmark Asset Management said on Wednesday it would begin its ETF launch in February.
UTI Asset Management has already obtained regulatory approvals, while Tata Asset Management Ltd, Prudential ICICI Asset Management and Kotak Mahindra Asset Management Co. Ltd have filed offer documents.
“It is going to be a long haul. It may take two to three years for the ETFs to take off fully,” said Rajan Mehta, executive director of Benchmark, who estimated his fund might attract 10-20 tonnes of gold in the next two to three years.
ETFs allow investors to gain exposure to commodity markets without setting up futures trading accounts or taking physical delivery. Sponsors of such funds buy a matching amount of the commodity from the market to keep in bank vaults.
There are some 10 bullion ETFs in countries including the US, the UK , Australia , Turkey, Singapore and South Africa.
Gold held in ETFs worldwide rose 66% to 604 tonnes in 2006— the equivalent of China’s official gold reserves. Analysts said India lacked a strong bank network in rural areas, where two-thirds of the country’s one billion people live. “India is not Switzerland,” said Michael Widmer, director of metals research at Calyon Corporate and Investment Bank.
“Switzerland is a relatively well-banked market. If I want to buy a gold ETF, I just pick up the phone and talk to my bank. I think it’s tough to do the same in a country like India.
“I am sure you will have some buying, especially in big cities, but the further you move towards the countryside, it will be a bit of challenge.”
Analysts said it would be hard to convince retail consumers, small investors and jewellers to invest in gold ETFs in India, where jewellery accounts for 80% of annual gold demand of some 800 tonnes, nearly a quarter of global bullion demand.
Households in Asia’s third-largest economy have accumulated some 20,000 tonne gold over generations. Gold is seen as an auspicious metal in India and buying surges during festivals and wedding seasons.
Gold jewellery is the most common gift during religious events in India and forms an essential part of the dowry basket.
“I am a bit sceptical about ETFs. Basically, in this country, they are a class who only want to make money and not lose,” said Gnanasekhar Thiagarajan, director of Commtrendz Research. “The concept is good, but it is not correct to paint a rosy picture,” India-based Thiagarajan said.
Indian bullion investors still prefer jewellery, analysts said.
“It would definitely attract different buyers for different reasons, but in no way is it going to compete against this very strong feeling and attachment with physical gold in India,” Frederic Panizzutti, analyst at MKS Finance in Germany, said of the ETF.
Some stock market players might also try their luck. “I think a typical ETF investor in India is likely to be in a high income bracket and quite sophisticated and, therefore, I don’t think it is important to them to own the gold,” said New York-based James Steel, analyst at HSBC Bank. Spot gold was quoted at $653(Rs2,8862.6) on Thursday.