Indian gold funds are shrinking for the first time since June as investors in the biggest bullion- consuming nation follow billionaire George Soros in pulling money from products backed by the precious metal.
Exchange-traded funds (ETFs) in gold saw outflows of Rs 8 crore ($1.5 million), data from the Association of Mutual Funds in India (Amfi) show. Investments in sovereign-debt funds rose by Rs 446 crore, the sixth straight month of inflows. Gold prices in India have slid 4.3 per cent this year, while rupee bonds returned 2.7 per cent, the second-highest gains in Asia.
"Globally we are seeing a decelerating gold trend, and overweight investors will be adjusting asset allocations," Lakshmi Iyer, Mumbai-based head of fixed income and products at Kotak Mahindra Asset Management Co., which oversees about $6 billion of assets, said in a March 14 telephone interview.
"We should see some interest-rate easing over the next two or three quarters," encouraging people to seek capital gains in bonds, she added. Soros cut his holdings in SPDR Gold Trust, the largest exchange-traded gold product, by 55 per cent last quarter, and Goldman Sachs Group Inc predicts the metal's 12-year rally will end as a US economic recovery gathers momentum.
"A lot of investors are replicating George Soros in liquidating their gold positions as they might be feeling there is no more requirement for safety in their portfolio," Kishore Narne, Mumbai-based head of commodities and currency at Motilal Oswal Commodity Broker Pvt Ltd, said by telephone yesterday. "There is a feeling that the worst is over" for the global economy, he said.
Goldman Sachs last month reversed an assumption that exchange-traded gold holdings will expand in 2013, analysts Damien Courvalin and Jeffrey Currie wrote in a February 25 report, after minutes of the Federal Reserve's January meeting showed several policy makers said the central bank should be ready to vary the pace of its $85 billion in monthly bond purchases.
The Dow Jones Industrial Average climbed to a record on March 14 and the Dollar Index, which tracks the greenback against six counterparts, rose to the highest level since August on March 13 as employment growth surged in the world's largest economy. Gold prices tend to move inversely to the currency. Investments in Indian gold ETFs are unlikely to recover in coming months as investors will look for appreciating assets, Kotak Mahindra Asset's Iyer said.
Technical charts indicate gold futures on MCX will probably drop to a support level of Rs 28,700 per 10g ($1,645.03 an ounce) within a month, Dhanik Shah, a senior analyst at Angel Commodities Broking Pvt in Mumbai, said on March 11. That would be the lowest intraday level since May 18.
While the appeal of gold as an investment has weakened, ICICI Bank Ltd, Royal Bank of Scotland Plc and Quantum Asset Management Co expect demand for the metal to remain relatively high in India. ICICI Bank estimates the nation's households hold $1.1 trillion of gold, which accounts for about seven per cent of their total wealth. The precious metal is the predominant form of savings in rural India, where about 70 per cent of India's 1.2 billion people live, Nilesh Mundra, head of investment strategy for private banking at ICICI, said on March 13.