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ETFs Have Boosted Gold As An Investment Option

Monday, February 27, 2012

Prithviraj Kothari Managing Director, RSBL and current president Bombay Bullion Association, (BBA)

Gold has always been a popular investment destination for various types of investors, standing out as a tried and true safe haven that generally performs well in times of equity market turbulence as well as an alternative to fiat currencies that have occasionally come under pressure.

But the development of exchange-traded funds has given gold a tremendous boost in the investing world, and the combination of precious metals exposure and the exchange-traded structure has proven to be an extremely efficient marriage that is appealing to all types of investors.

Historically gold has been popular in India for holding it in the form of jewellery. But over the years there has been a lot of awareness in the general public over gold as a financial asset. The retail investors have started investing in gold online rather than holding it in physical form.

Gold ETFs have been a success story around the world and Indians are warming up to the idea of investing in it since they were launched in 2007.

Demand for physical gold in India is approximately 700 tonnes annually whereas gold ETF accounts to just 30 tonnes annually that's a mere 3 per cent of the total gold consumption.  But industry players suggest it could rise by at least 50 per cent year-on-year.

The gold collections of ETFs have risen from 15 tonnes in 2010 to 30 tonnes in 2011 (an increase of 100 per cent). The number of corporate portfolios under ETFs has also increased to 5,599 in 2011 as against 3,310 in 2010

A World Gold Council (WGC) report states that India imported around 960 tonnes of gold in 2011. As such, Gold ETF demand at 30 tonnes accounts for only about 3 per cent of total Indian import demand. However, this percentage is expected to increase.

Gold ETFs are open ended mutual funds that help you invest your money in gold which is 99.5 per cent pure.  Gold Exchange Traded Funds are also known as paper gold.

There are already a dozen other gold ETF products by different asset management companies, but, physical delivery is not offered to individual retail investors. Only market participant can take physical delivery of minimum 1 kg gold.

However, for the first time, a new Gold ETF has been launched wherein, Indian retail investors in gold ETFs (exchange traded fund) will get a chance to take physical delivery.

By taking physical delivery of gold bars, investors will be able to buy pure gold much cheaper than available in coins and bar form with banks and jewellers who charge a premium of 6 to 17 per cent over the imported gold price.

As investors do that, they also get the benefit of essentially buying gold at spot prices, which today they cannot do in any other investment option, whether it's buying through physical gold option or buying through the electronic option. So typically, they end up paying a premium over spot prices. I believe Gold ETF’s should make up atleast 5-10 per cent of an investor’s portfolio to give him balanced returns from all the available investment options.

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