By Kishori Krishnan, Exclusive to Gold Investing News
Mumbai, India

It’s a new form of gold rush. Prospectors, jewelery stores and pawnshop counters are passé in the wake of this new feed. The feverish charge for the yellow metal is now unfolding across corporate offices, mutual fund counters and retail stores across India. The biggest consumer of the metal, some 950 tones of it annually, India and her gold-hungry consumers are cozying up to gold funds.

Gold Exchange Traded Funds (ETFs) have been a much-anticipated development in India. Expected to address issues of high prices, purity, costs of insurance and storage, and liquidity associated with investing in physical gold, ETFs have become the most efficient form of holding the precious metal.

Of the five funds launched in the country post January 14, 2007, assets under management have already crossed five tonnes. Little wonder then that the World Gold Council, which has still now adopted a `wait-and-watch’ policy, is thinking of jumping in the fray.

As Dharmesh Sodah, Director at the World Gold Council maintains, “Though we do not have an ETF in  India, it is definitely on our radar. We have been interacting with the five gold funds regularly.”

Sanjiv Shah, Executive Director, Benchmark Mutual Fund, the fund house that launched India’s first gold ETF, is clearly upbeat on the sector. “Gold is an all-season asset. Gold ETFs do not just have the potential to increase mobilisation of gold, it is also expected to increase hallmarking of the metal.”

Adds Ravi Srinivasan of the Unit Trust of India Mutual Fund (UTI MF), which also has a gold ETF, “Exchange funds tend to cost less to own than actively managed equity funds and even some index mutual funds, a cost that’s calculated as an expense ratio.”

Another potential advantage, he adds, is that ETFs have lower churn and hence, lower expenses than actively managed funds. “That is because ETFs are not trying to beat the market,” he counters.

Be that as it may, three other corporates – Reliance Mutual Fund, Kotak Mutual Fund and Quantam – launched a gold ETF this year. As Kandahar Shastri, analyst at the UTI MF said, “While gold funds have been operational in the developed markets for some time, gold ETF is a recent development in India. StreetTRACKS Gold Trust is the first Gold ETF marketed by `State Street Global Markets’ (SSgA) and sponsored by the World Gold Council. The Fund mopped up $550 million”. Incidentally, UTI MF in India has a tie-up with SSgA as an investment advisor for investing in overseas market whenever such products are launched.

Globally, the World Gold Council has been pushing for an exchange-traded fund that will invest directly in gold bullion, to be called Equity Gold Shares. For India, the Council feels there is no time like now.

“ETF is a concept that is fairly new in India. It is not at optimal, given the fact that we Indians are passionate about our gold and would rather `hold and feel’ the metal in the form of jewelry. There are other deterrents, too,” explains WGC Director Mr Sodha.

Internationally, the cost of holding gold in a World Gold Council ETF is 40 basis points – 0.4 per cent. In India, funds charge a management fee of 100 basis points or 1 per cent. “We have to ensure that the market develops to such an extent that we can also bring down our handling charges in tune to the international benchmark,” says Mr Sodah.

There are other hiccups. For a consumer to invest in ETFs, he has to have a demat  account (which holds shares electronically rather than in physical form) and produce a PAN (Permanent Account Number)card for Income Tax purposes, which is a pre-requisite to invest in any mutual fund or stock market in India.

Interestingly, there are far too many positives. Given that 76 per cent of all gold sold in the country is used to make ornaments, which is a product of desire, and which includes manufacturing, retailing and packaging cost, consumers tend to pay a premium of 10-15 per cent over the actual price of gold.

The second option for Indian consumers is gold coins, which is traded in for jewelery at the time of say, a wedding in the family. The premiums associated with gold coins hover around 4-5 per cent. In the case of ETF, the cost is only 1 per cent. Recent trends show that more and more customers are reverting to buying this form of gold.

Analysts tracking the gold sector note that the funds can do more to market ETFs. “They can get into SIPs (Systematic Investment Plans), do more in terms of awareness, identify High Networth Individuals and showcase the 33 per cent growth in gold price over a year, in order to bring in more customers. Clearly, gold has outperformed every other asset class,” says Mr Dilip Solanki at Quantam MF.

He adds that gold prices could also go up due to demand from gold ETFs, as they did in the London Stock Exchange in 2004.

“It’s the mother of all bullion products,” adds Arkon Smith, a gold analyst at Mitsui Precious Metals in New Delhi, summing up the country’s inherent desire.

Despite the fact that John Maynard Keynes, the renowned British economist who famously advocated digging holes and filling them up during the Depression in the 1930s, once castigated gold as a “barbarous relic”, its peculiar appeal simply refuses to fade in India where buyers account for 23 per cent of the world’s total annual demand for gold.

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