ETFs upright on high gold tide

Last Updated: Fri, Sep 07, 2012 04:52 hrs

At the present peak prices, India's physical gold demand has declined, while paper gold remains attractive for investors.

Assets under management (AUMs) for gold exchange traded funds (ETFs) rose to Rs 10,300 crore in July, with a net inflow of Rs 95 crore. Gold prices had crossed Rs 31,700 per 10g, an all-time high in Indian spot markets, on Tuesday.

Data compiled by the Association of Mutual Funds in India shows AUMs for gold ETFs sharply rose over the past year against several other asset classes, including equity funds, equity-linked savings fund or income funds. The rise was 41 per cent on a year-on-year basis, from Rs 6,119 crore as on July 31 last year to Rs 10,398 crore on July 31, 2012. Since March 31 this year, they've risen five per cent. AUMs for equity funds and equity-linked savings scheme funds witnessed a six to eight per cent fall in the past year and one of 2-2.5 per cent since March 31, 2012.

"In the current market conditions, not many investors prefer equities. We see a lot of redemption happening in mutual funds over the past year. For ETFs, there was great growth till last year; this year, net inflows are not that attractive due to the stagnated gold prices in the early part of the year," said Sunil Jain, vice-president, equity research, Nirmal Bang Securities.

Gold was quoted at Rs 31,482 per 10g for October delivery on the Multi Commodity Exchange yesterday.

"Physical demand has dropped 30-35 per cent in the past 15 days. There is weak demand for jewellery but we expect it to increase, as prices are likely to stabilise by the end of September," said Rajesh Mehta, chairman, Rajesh Exports Ltd, a leading gold trading agency. "There is no possibility of a further increase in gold prices. We see the prices going down from here or stabilising at the current levels."

According to jewellery retailers, the higher prices are hampering jewellery demand but might not affect investor demand in the long run, even as ETF demand remains robust.

Gold prices jumped during 2010-11, from Rs 20,585 in December 2010 to Rs 27,190 by December 2011. For the past three-four months, these have remained range-bound. In June, it was Rs 29,860 per 10g.

"The current high prices are acting as a dampener for physical gold demand. However, prices have stopped rising further and we see it going down to as low as Rs 30,000 per 10g in some weeks. Also, ETFs are available at discounted rates. The increased AUMs are partly due to appreciation in gold prices," said Prithviraj Kothari, president of the Bombay Bullion Association and managing director of Riddisiddhi Bullions, one of the largest traders in this segment.

AUMs as on (figures in bracket show % share to total AUMs)
Asset class 3/31/2012
(Rs crore)
(Rs crore)
(Rs crore)
(Rs crore)
growth (in %)
Gold ETF 9886 (2%)  10,086 (2%) 10,398 (2%) 6119 (1%) 41.0
Income funds 290,844 (50%) 316,735 (46%) 340,181 (47%) 324,181 (45%)  4.7
Liquid funds 80,354 (14%) 158,853 (23%) 178,136 (24%) 180,331 (25%) -1.2
Equity funds 158,432 (27%) 156,389 (23%) 155,134 (21%) 166,978 (23%) -7.6
ELSS - Equity 23,644 (4%) 23,229 (3%) 23,068 (3%) 24,629 (4%)  -6.8
Total 587217(100%) 688,825 (100%) 730,361 (100%) 728,187 (100%) 19.5
Source: Association of Mutual Funds in India (AMFI)

During June, gold ETFs witnessed redemptions but a reversal came in July as mentioned earlier, with a net inflow of Rs 95 crore during the month. According to the World Gold Council (WGC), this country's demand during the second quarter (April-June) of this calendar year was 181 tonnes, about 38 per cent lower against the same period last year.

Higher prices are likely to affect India's gold imports adversely, with a likely fall of 25 per cent or 200-250 tonnes for 2012. By WGC estimates, Indian gold demand is likely to be close to 700 tonnes in 2012, lower by about 30 per cent from the previous year.